<PAGE>
As Filed Pursuant to Rule 424(b)(2)
Registration Statement No. 333-43198
[LOGO]
Rights Offering of Ordinary Shares and American Depositary Shares
------------------
Pearson plc is offering holders of its ordinary shares transferable rights
to subscribe for new ordinary shares at a price of L10 per share. Pearson plc is
also offering holders of its American Depositary Shares, or ADSs, each of which
represents one ordinary share, transferable rights to subscribe for new ADSs at
the US dollar equivalent of L10 per share. A UK tax of 1.5% per share is payable
by each holder of an ADS who exercises an ADS right. At current exchange rates,
L10 represents approximately $15. We intend to use the net proceeds of this
rights offering to finance our pending acquisition of National Computer Systems,
Inc., or NCS.
- We will grant three transferable share rights for every 11 ordinary shares
you own of record on July 28, 2000.
- We will grant three transferable ADS rights for every 11 ADSs you own of
record on July 28, 2000.
- We have made arrangements for you to pay the ADS right subscription price
in US dollars.
- Share rights expire on September 1, 2000 and ADS rights expire on
August 30, 2000.
Goldman Sachs International and Cazenove & Co. have agreed, severally, to
underwrite up to 150,000,000 of the 170,528,278 shares offered in the rights
offering. A portion of the underwritten shares may be sold or resold by the
underwriters under this prospectus in the United States by selling agents of the
underwriters.
Our ordinary shares are traded on the London Stock Exchange and the ADSs
have been trading in the over-the-counter market in the US. On July 28, 2000,
the last reported sale of an ordinary share on the London Stock Exchange was
L20.10.
We will apply to list the ADRs evidencing ADSs on the New York Stock
Exchange under the symbol "PSO".
We do not intend to list the ADS rights, but you may trade them in the
over-the-counter market. The share rights will trade on the London Stock
Exchange.
SEE "RISK FACTORS" ON PAGE 11 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING ORDINARY SHARES OR ADSS.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Assuming the rights are exercised in full, our gross proceeds from the
rights offering will be approximately L1.7 billion or $2.6 billion. We estimate
that our expenses in connection with the offering, including the underwriting
fee we expect to pay, will be approximately L15 million or $22.5 million. As a
result, the net proceeds to us will be approximately L1.69 billion or
$2.54 billion.
JOINT GLOBAL COORDINATORS
<PAGE>
GOLDMAN SACHS INTERNATIONAL CAZENOVE & CO.
----------------
GOLDMAN, SACHS & CO. CAZENOVE INC.
Prospectus dated August 9, 2000.
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION;
EXCHANGE RATE INFORMATION
We have prepared the financial information contained in this prospectus in
accordance with UK GAAP, which differs in significant respects from US GAAP. We
describe these differences in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Accounting Principles", and in Note 34 to
our consolidated financial statements included in this prospectus. Unless we
indicate otherwise, any reference in this prospectus to our consolidated
financial statements is to the consolidated financial statements and the related
notes, included elsewhere in this prospectus.
We publish our consolidated financial statements in sterling. We have
included, however, references to other currencies. In this prospectus:
- references to "sterling", "pounds", "pence" or "L" are to the lawful
currency of the United Kingdom,
- references to "euro" or "[EURO]" are to the euro, the single currency
established by the European Monetary Union, and
- references to "US dollars", "cents" or "$" are to the lawful currency of
the United States.
For convenience and except where we specify otherwise, we have translated
some sterling figures into US dollars at the rate of L1.00 = $1.51, the noon
buying rate in The City of New York for cable transfers and foreign currencies
as certified by the Federal Reserve Bank of New York for customs purposes on
June 30, 2000. We do not make any representation that the amounts of sterling
have been, could have been or could be converted into US dollars at the rates
indicated.
The following table sets forth, for the periods indicated, information
concerning the noon buying rate for sterling, expressed in US dollars per
sterling. The average rate is calculated by using the average of the noon buying
rates in The City of New York on each day during a monthly period, and on the
last day of each month during an annual period.
<TABLE>
<CAPTION>
MONTH HIGH LOW END AVERAGE RATE
----- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
August (through August 4)........................ $1.50 $1.49 $1.50 $1.50
July 2000........................................ $1.52 $1.49 $1.50 $1.51
June 2000........................................ $1.52 $1.49 $1.51 $1.51
May 2000......................................... $1.56 $1.47 $1.50 $1.51
April 2000....................................... $1.60 $1.56 $1.56 $1.58
March 2000....................................... $1.59 $1.57 $1.59 $1.58
February 2000.................................... $1.62 $1.58 $1.58 $1.60
January 2000..................................... $1.65 $1.62 $1.62 $1.64
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 HIGH LOW END AVERAGE RATE
------------------------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
$1.65 $1.47 $1.51 $1.57
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 HIGH LOW END AVERAGE RATE
---------------------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
1999............................................. $1.68 $1.55 $1.62 $1.62
1998............................................. $1.72 $1.61 $1.66 $1.66
1997............................................. $1.70 $1.58 $1.64 $1.64
1996............................................. $1.71 $1.49 $1.71 $1.57
1995............................................. $1.64 $1.53 $1.55 $1.58
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD READ CAREFULLY THIS ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE ACQUIRING ANY
ORDINARY SHARES OR ADSS.
IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO
"WE", "US", "OUR" AND "PEARSON" REFER TO PEARSON PLC AND ITS SUBSIDIARIES.
INTRODUCTION
Pearson is a global media company with its principal operations in the
education, business information, consumer publishing and television markets. We
have significant operations in the United States and generate more than half our
revenues from that market. On July 31, 2000, we announced an agreement to
acquire National Computer Systems, or NCS, for a purchase price of approximately
$2.5 billion. NCS, which trades on the NASDAQ market under the symbol "NLCS", is
a leading testing and educational services company in the US. The combination of
NCS and our Pearson Education division will create an integrated education
company with strong market positions in curricular content, online learning,
assessment, enterprise applications for US schools and professional
accreditation.
We intend to finance the acquisition of NCS through the rights offering to
existing shareholders. We believe the rights offering to be the most efficient
means for us to raise the necessary funds.
PEARSON PLC
We create and manage intellectual property, which we promote and sell to our
customers under well-known brand names, to inform, educate and entertain. We
deliver our content in a variety of forms and through a variety of channels,
including books, newspapers, television programs and internet services.
We use online capabilities in our back office, our supply chains, our base
businesses and new businesses we create. The internet is already both an
integral part of each of our businesses and a facilitator of new product and
distribution opportunities.
Although we seek to build businesses that are worth more together than apart
because of the synergies they offer each other, our operations break down into
four core areas:
- PEARSON EDUCATION is a leading international publisher of textbooks,
supplementary materials and electronic education programs for elementary
and secondary school, higher education and business and professional
markets. In the US, our Scott Foresman, Addison Wesley Longman, Prentice
Hall and Allyn & Bacon brands have enabled us to capture significant
shares in the kindergarten through 12th grade markets. Our higher
education business has been pre-eminent in the US for many years. Our
international education business is the global leader in the English
language teaching materials market and has a major position in the
textbook and educational materials market outside the US, including being
the largest textbook and school program provider in a number of local
markets. In addition, we are a leader in using technology to educate,
including online assessment and digital courseware through the Computer
Curriculum Corporation, as well as products such as the Waterford Early
Reading Program and the KnowZone. Our education offerings also extend to
business education, where FT Knowledge provides distance learning for the
corporate and post-secondary markets and has entered into several
agreements with major business schools and other educational institutions
in the US and worldwide. We are currently developing the Learning Network,
a vertically integrated, internet-delivered community linking parents,
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teachers and students with educational opportunities. On June 29, 2000, we
announced the purchase of an 87% interest in FamilyEducation Network,
Inc., an online network for parents, teachers and students. We are working
to form strategic alliances with other internet content providers, to put
in place the necessary technological infrastructure and management team
for the Learning Network and to develop a marketing program. We expect to
launch the Learning Network in the Fall of 2000.
NCS, which will become a part of Pearson Education upon completion of the
acquisition, is the United States' largest commercial processor of student
assessment tests for kindergarten through 12th grade. NCS offers secure
internet-based electronic testing delivery and reporting capability,
allowing it to participate in the professional certification market. It
also provides software, services, systems applications and internet-based
technologies for the collection, management and interpretation of data in
education. NCS seeks to use internet-based technologies to increase its
market penetration and offer additional innovative products and services
to its customers in the education field.
- THE FT GROUP consists of our international newspaper, print and online
financial information, business magazine and professional publishing
interests. Our flagship product is the FINANCIAL TIMES, known
internationally for its premium editorial content and international scope.
Building upon the success of the FINANCIAL TIMES, we have developed a
global information portal (FT.com), an online personal finance resource
(FTYourMoney.com), and a European online financial news website
(FTMarketWatch.com). We have also developed a pan-European network of
leading business newspapers and related online business portals, including
FINANCIAL TIMES DEUTSCHLAND, LES ECHOS and EXPANSION, for the German,
French and Spanish-speaking markets. We own Recoletos, a Spanish media
group which, in addition to EXPANSION, publishes MARCA, the leading
Spanish sports newspaper, and we hold a 50% stake in THE ECONOMIST, an
international weekly current affairs and business magazine. We also own
60% of Data Broadcasting Corporation, a supplier of electronic database
services to US and UK securities professionals. Data Broadcasting
Corporation has a 34% ownership interest in MarketWatch.com, whose web
properties, CBS.MarketWatch.com and bigcharts.com, are among the most
popular destinations for financial and market news on the web.
- THE PENGUIN GROUP is one of the premier English language publishers in the
world, with brand imprints such as Penguin, Avery, Dutton, Putnam and
Viking. We publish an extensive portfolio of fiction and non-fiction,
literary and commercial works from authors such as Tom Clancy, Clive
Cussler, Dick Francis, Patricia Cornwell and Nick Hornby. We are one of
the pre-eminent classics publishers and own or have rights to some of the
most highly prized and enduring brands in children's publishing, featuring
the books of Roald Dahl and such popular characters as Spot, Peter Rabbit
and Madeline. We have a strong frontlist of new books by bestselling
authors, and a backlist of more than 25,000 popular titles. In 1999,
titles published by Penguin Putnam, as we are known in the US, spent a
record 262 weeks on THE NEW YORK TIMES bestseller list. Our recent
acquisition of Dorling Kindersley, or DK, a leading international
publisher of illustrated reference books, will add breadth to our
portfolio. DK offers many products with illustrations and graphics that
are particularly well-suited for online delivery, and DK has invested in
converting its properties into a digital format. As a result, this
acquisition also gives us many more opportunities for online rights
exploitation.
- PEARSON TELEVISION was recently merged with CLT-Ufa, the television and
broadcasting business owned by Germany's Bertelsmann AG, and Belgium's
Audiofina, to create the RTL Group. The combined company is an integrated
pan-European company with activities in television production, online
delivery and broadcasting, including the well-known RTL television
stations. The RTL Group is Europe's largest radio and television broadcast
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company by revenue and its shares are traded on the London Stock Exchange.
The terms of the merger, which closed on July 25, 2000, provide us with a
22% interest in the RTL Group and representation on its board.
COMPETITIVE STRENGTHS
We have achieved leading positions in our markets by capitalizing on our
competitive strengths:
- POWERFUL BRANDS--We have made a substantial investment to develop and
promote our quality brands. Our brands create customer loyalty and
facilitate the use of new distribution channels and our entry into new
markets.
- RICH CONTENT--Each of our businesses creates and manages informative,
educational and entertaining content. The quality, depth and originality
of our products reinforce the strength of our brands and attract
customers, partners and talented employees.
- INTERNATIONAL SCALE--We have operations around the world and publications
in English, French, Spanish, German and many other languages. Our large
business presence in many local markets enables us to move rapidly to
capitalize on international opportunities.
- ATTRACTIVE CUSTOMER BASE--Our products appeal to a range of
customers--institutions, businesses and a broad group of consumers of all
ages and interests. We have a highly educated customer base with a
substantial discretionary spending capacity.
- PROVEN MANAGEMENT TEAM--Since 1997, a new management team has transformed
the company into a simpler, more integrated media enterprise focused on
our core businesses. Since we started this process, we have publicly set
clear financial goals and consistently met or exceeded them.
OUR STRATEGIES
We focus on media businesses in growing markets and categories where we have
or we can attain strong, sustainable market positions. We use our content and
brands in our existing businesses and to develop new ones. We have integrated
the internet into each of our businesses to enhance our customers' experiences,
improve our ability to reach customers and increase the value of our content.
- PEARSON EDUCATION constantly seeks ways to make products more attractive
to teachers, students, parents and professionals. Over 1,200 of our
approximately 49,000 college textbooks have interactive companion websites
with online study guides to elaborate on text concepts, and chat rooms and
bulletin boards to facilitate interaction between students and faculty. We
continue to invest in a range of electronic learning tools to support our
programs. We are also developing the Learning Network, an interactive
online community of parents, students and teachers, to further expand the
distribution of our content and generate new revenue streams. In addition,
we are seeking to expand our international reach to benefit from our
market expertise and build scale.
Our acquisition of NCS will transform Pearson Education into an integrated
education company. The combined business will be well-placed to create new
market opportunities through developing customized learning in which
testing and curriculum work together. The combined business will connect
schools and homes, enabling parents to play a more active role in the
education of their children.
- THE FT GROUP aims to be the leading source of strategic information,
intelligence, analysis and commentary for senior managers and
institutional and individual investors around the
3
<PAGE>
world. We are building on the strength of our flagship brand, the
FINANCIAL TIMES, to create a pan-European network of national business
newspapers and websites, including LES ECHOS in France, EXPANSION in Spain
and FINANCIAL TIMES DEUTSCHLAND in Germany. With THE WALL STREET JOURNAL,
we have also launched VEDOMOSTI, a Russian language business newspaper.
We use the well recognized brand and premium content of the FINANCIAL
TIMES to develop new websites with diverse revenue models. We continue to
invest in FT.com, our leading global business information portal, to
further enhance its content, include more international company and market
information and add more sophisticated tools intended to increase the
"stickiness" of the site. We have launched FTYourMoney.com, to capitalize
on the rapidly growing personal finance market in the UK, and
FTMarketWatch.com, to capture the expanding market of European investors
who make their investment decisions online or look to the internet for
quick, market-oriented news.
- THE PENGUIN GROUP continues to strengthen its frontlist, working globally
to extend its stable of bestselling authors and identify new talent. We
are digitizing our business--all of our new titles and over half of our
backlist titles have been converted to an electronic digital format to
enable "printing on demand" and "e-book" delivery. We are also building
online communities around authors and genres to strengthen our
relationship with our readers and to create new revenue streams.
We recently acquired DK, a publisher of illustrated products such as
travel and children's reference books. We believe that DK's high quality
illustrated publications, many of which have been converted to a digital
format permitting online delivery, will provide us access to new customers
and markets, expand our product offerings and enhance our online marketing
efforts.
- PEARSON TELEVISION'S recently completed merger to form the RTL Group
offers Pearson Television the opportunity to take its quality content into
new distribution channels that are offered by our new media partners. The
RTL Group will continue Pearson Television's development of online
versions of television shows, such as THE PRICE IS RIGHT, and the building
of online communities around popular serial dramas.
We are working to capture the full synergistic potential that exists among
our media businesses through the sharing of content and distribution channels.
For example, FT Knowledge, our online distance learning business, results from
the merger of Pearson Education's higher education textbooks and professional
publishing resources with the FT Group's distance learning and management
education resources. Longman Penguin Readers are simplified classics for new
English speakers, combining Pearson Education's English language training
resources and Penguin's classics library. Content from Penguin and the FT Group
will be featured on our Learning Network.
STRATEGIC DEVELOPMENTS
In 1997, new management undertook a comprehensive review of our business and
established core financial targets for sales growth, cash flow, earnings per
share and operating margins. Management has since implemented a number of
strategic and operating initiatives in order to streamline and interrelate our
portfolio of businesses and increase employee share ownership.
As part of the initiatives undertaken by management since 1997, we have
completed approximately 120 divestitures and acquisitions. We have divested
businesses with a total value of over L2.0 billion. To increase the strength of
our core businesses, in addition to the NCS acquisition discussed below, we have
acquired businesses with a total value of over approximately L3.7 billion,
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<PAGE>
including Simon & Schuster's educational, business & professional and reference
publishing businesses in 1998.
NCS ACQUISITION
NCS is a leading testing and educational services company in the US. For its
fiscal year ended January 29, 2000, NCS had revenues of $630 million, compared
to $505 million for the prior fiscal year, and income from operations of
$70 million, compared to $55 million for the prior fiscal year. At January 29,
2000, NCS had total assets of $450 million, total long-term debt of $2 million,
total cash and cash equivalents of $27 million and total stockholders' equity of
$276 million.
We have agreed to acquire all of the outstanding shares of NCS common stock
for approximately $2.5 billion, or $73 per share. Our merger agreement requires
us to launch a cash tender offer for all of the issued and outstanding shares of
NCS's common stock on or before August 7, 2000. The tender offer will remain
open for 23 business days, unless extended in accordance with the merger
agreement, and will be conditioned on the tender of a sufficient number of
shares to give us ownership of at least a majority of the fully diluted
outstanding shares of NCS. After the completion of the tender offer, NCS will
merge with us, and the remaining shareholders of NCS other than us will receive
the same cash consideration per share as offered in the tender offer. We intend
to finance the NCS acquisition with the proceeds of the rights offering.
We believe the acquisition of NCS is an important step in the development of
our Pearson Education business, providing the following opportunities:
- INTEGRATING EDUCATIONAL PROGRAMS. The combination of curricular content,
testing and educational applications will create opportunities to provide
schools, universities, colleges and professional and training
organizations a comprehensive range of education solutions, encompassing
curricular and training programs, assessment and testing and educational
services, including student curriculum, instructional and financial
management software.
- CUSTOMIZING LEARNING. Combining NCS's assessment tools with our curricular
content will enable us to create customized learning programs individually
tailored for each student.
- EXTENDING CUSTOMER REACH. Our salesforce will market NCS's instructional
management software, assessment tools and school administrative software
to kindergarten through 12th grade school districts to supplement NCS's
own direct salesforce.
- ACCELERATING THE DEVELOPMENT OF NEW ONLINE PRODUCTS. NCS's online business
will complement our business by enabling us to offer electronic end-to-end
learning solutions.
- DEVELOPING A NEW MARKET, WITH PARENTS AS CUSTOMERS. NCS's products will
enable us to reach parents with new educational content, creating new
revenue opportunities for our educational publishing business. It will
also extend the scale and reach of our Learning Network, enabling it to
reach directly a much bigger audience of parents and students.
- MOVING INTO NEW PROFESSIONAL MARKETS. Our professional publishing and
corporate training business will enable NCS to market its testing and
assessment skills to meet the growing demand for accreditation in a wide
range of professions and disciplines.
- WIDENING INTERNATIONAL SPREAD. With major educational publishing
operations around the world, Pearson Education will enhance NCS's
international presence.
5
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As a publicly traded company, NCS is subject to the informational
requirements of the Securities Exchange Act, and files reports and other
information with the SEC. The contents of these filed documents do not form a
part of this prospectus.
------------------------
Our principal place of business is located at 3 Burlington Gardens, London
W1X 1LE, England. Our telephone number is +44-20-7411-2000 and our registration
number in England is 53723.
6
<PAGE>
RIGHTS OFFERING SUMMARY
<TABLE>
<S> <C>
ORDINARY SHARES, INCLUDING ORDINARY SHARES
REPRESENTED BY ADSS, OUTSTANDING ON THE
RIGHTS OFFERING RECORD DATE................ 625,270,356
ORDINARY SHARES, INCLUDING ORDINARY SHARES
REPRESENTED BY ADSS, OFFERED............... 170,528,278
ORDINARY SHARES, INCLUDING ORDINARY SHARES
REPRESENTED BY ADSS, OUTSTANDING AFTER THE
RIGHTS OFFERING, ASSUMING FULL
SUBSCRIPTION............................... 795,798,634 ordinary shares, excluding
approximately 15,400,000 ordinary shares to
be issued pursuant to outstanding options
under employee stock incentive plans.
UNDERWRITING................................. Goldman Sachs International and Cazenove &
Co. have agreed, severally, to act as standby
underwriters for up to an aggregate of
150,000,000 ordinary shares. To the extent
the underwriters are obligated to take up
ordinary shares, their selling agents may
sell or resell them in the United States
under this prospectus.
USE OF PROCEEDS.............................. We intend to use the anticipated
L1.7 billion ($2.6 billion) proceeds from
the rights offering to finance the NCS
acquisition and pay the associated expenses.
HOLDERS OF ORDINARY SHARES:
Share rights............................... We will grant three transferable share rights
for every 11 ordinary shares owned at the
close of business in London on the share
right record date.
Share subscription price................... L10
Share right record date.................... July 28, 2000
Share right expiration date................ September 1, 2000
Share right subscription period............ August 10, 2000 through September 1, 2000
Share certificates......................... We will mail certificates representing new
ordinary shares to the holders by October 2,
2000.
Unexercised share rights................... The new ordinary shares relating to
unexercised share rights may be sold on
behalf of the unexercising holders through
arrangements with the underwriters. If they
are sold at a price in excess of the share
subscription price and the expenses of sale,
the aggregate premium will be paid pro rata
to the unexercising holders of share rights.
Listing.................................... Our ordinary shares are traded on the London
Stock Exchange under the symbol "PSON". The
share rights will also trade on the London
Stock Exchange.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
HOLDERS OF ADSS:
ADS rights................................. We will grant three transferable ADS rights
for every 11 ADSs owned on the ADS right
record date.
ADS subscription price..................... L10, which does not include a 1.5% UK tax for
which you will be responsible if you exercise
your rights. The ADS subscription price must
be paid in US dollars as outlined below.
Estimated US dollar ADS subscription Estimated at $16.50. As described in "The US
price.................................... Rights Offering", we have made arrangements
with The Bank of New York, as ADS
subscription agent, for you to pay the ADS
subscription price at this estimated US
dollar amount. To the extent the estimated US
dollar price is less than the actual US
dollar equivalent of the ADS subscription
price as of August 31, 2000, plus the 1.5% UK
tax, you will be required to pay the
difference. To the extent the estimated US
dollar price is higher, you will receive a
refund of the excess.
ADS right record date...................... July 28, 2000
ADS right expiration date.................. 12:00 noon (New York City time) on
August 30, 2000
ADS subscription period.................... August 10, 2000 through August 30, 2000
ADS subscription agent..................... The Bank of New York
ADR delivery............................... The Bank of New York will provide you with
American Depositary Receipts, or ADRs,
evidencing your new ADSs as soon as
practicable after October 2, 2000.
Unexercised ADS rights..................... The new ordinary shares underlying
unexercised ADS rights may be sold on behalf
of the unexercising holders, through
arrangements with the underwriters. If they
are sold at a price in excess of the share
subscription price and the expenses of sale,
any premium attributable to the unexercising
ADS holders will be paid to the ADS
depositary. The ADS depositary will pay any
amounts received by it, net of expenses and
commission, pro rata to the unexercising
holders of ADS rights.
ADS depositary............................. The Bank of New York
Listing.................................... We will apply to list the ADRs representing
the ADSs that you will receive in this rights
offering on the New York Stock Exchange under
the symbol "PSO". The ADS rights will not be
listed but you may trade them in the
over-the-counter market.
</TABLE>
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of Pearson should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes appearing elsewhere in this prospectus.
For convenience, we have translated the six months ended June 30, 2000 and
year ended December 31, 1999 amounts into US dollars at the rate of L1.00=$1.51,
the noon buying rate in The City of New York on June 30, 2000.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
------------------------------ ---------------------------------------------------------------
2000 2000 1999 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- -------- -------- --------
$M LM LM $M LM LM LM LM LM
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UK GAAP INFORMATION:
CONSOLIDATED PROFIT AND LOSS
ACCOUNT DATA
Total sales.................... 2,333 1,545 1,306 5,031 3 ,332 2,395 2,293 2,186 1,830
Total sales from continuing
operations................... 2,333 1,545 1,306 5,031 3,332 2,251 2,011 1,830 1,484
Operating profit from
continuing operations(1)..... (29) (19) 25 408 270 187 252 132 192
Total operating profit......... (17) (11) 46 480 318 250 328 189 267
Profit after taxation.......... 137 91 (38) 453 300 441 40 248 272
Operating profit before
internet enterprises,
goodwill amortization and
other items(2)............... 236 156 133 888 588 389 328 289 267
Earnings per equity share(3)... 21.4 CENTS 14.2p (6.6)p 72.8 CENTS 48.2p 74.1p 6.6p 42.8p 47.1p
Adjusted earnings per equity
share after internet
enterprises(4)............... (0.9) (0.6) 6.3 73.2 48.5 42.0 34.9 30.6 28.8
Adjusted earnings per equity
share before internet
enterprises(5)............... 15.1 10.0 7.1 80.5 53.3 42.0 34.9 30.6 28.8
Diluted earnings per equity
share(6)..................... 20.8 13.8 (6.5) 71.7 47.5 73.3 6.4 42.5 46.4
CONSOLIDATED BALANCE SHEET DATA $M LM LM $M LM LM LM LM LM
Total assets (Fixed Assets plus
Current Assets).............. 9,817 6,501 5,447 8,079 5,350 5,317 2,253 2,246 2,568
Net assets..................... 2,935 1,944 1,107 2,004 1,327 1,084 156 393 856
Long-term obligations(7)....... 3,059 2,026 2,312 3,452 2,286 2,562 609 556 475
Capital Stock.................. 236 156 153 231 153 152 144 143 139
Number of equity shares
outstanding (millions of
ordinary shares)............. 625 625 611 613 613 610 577 571 556
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------------
1999 1999 1998
-------- -------- --------
$M LM LM
<S> <C> <C> <C>
US GAAP Information:(8)
Profit for the financial year............................... 299 198 444
Profit from continuing operations for the financial year.... 254 168 122
Basic earnings per equity share............................. 48.9 CENTS 32.4p 75.3p
Diluted earnings per equity share........................... 48.5 32.1 74.6
Basic earnings from continuing operations per equity
share..................................................... 41.5 27.5 20.7
Diluted earnings from continuing operations per equity
share..................................................... 41.1 27.2 20.5
$M LM LM
Shareholders' funds......................................... 3,949 2,615 2,468
</TABLE>
------------------------------
(1) Continuing operations represent those operations carried on by us as at
June 30, 2000. Operating profit from continuing operations consists of
operating profit--Group, plus the Group's share of operating profit from
continuing operations for Group associates, as disclosed on page F-3 of the
consolidated profit and loss account.
(2) Other items include a L100 million charge for Penguin improper accounting in
1996, Year 2000 compliance costs of L5 million in 1999 and L7 million in
1998, integration costs in connection with our acquisition of Simon &
Schuster's educational, business & professional and reference publishing
business of L95 million in 1999 and L120 million in 1998 and integration
costs in connection with our acquisition of DK of L3 million in the first
six months of 2000.
(3) Earnings per equity share is based on profit for the financial period and
the weighted average number of ordinary shares in issue during the period.
(4) Adjusted earnings per equity share is based on adjusted earnings for the
financial period and the weighted average number of ordinary shares in issue
during the period. Adjusted earnings excludes profits or losses on the sale
of fixed assets and investments, businesses and associates, Year 2000
compliance costs and integration costs in respect of the Simon & Schuster
acquisition and the DK acquisition and, following the prospective
implementation of FRS10 "Goodwill and Intangible Assets" in 1998, goodwill
amortization. In 1996, the L100 million exceptional charge for improper
accounting in Penguin and the loan stock redemption premium have also been
excluded. In the first six months of 2000, the accelerated amortization of a
financing arrangement fee has also been excluded.
(5) Due to expenditures of L84 million in the first six months of 2000 and L39
million in 1999 on new internet enterprises, a second adjusted earnings per
equity share in accordance with UK GAAP is presented in which the results of
these internet enterprises are also excluded from earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General Overview--Internet Enterprises".
(6) Diluted earnings per equity share is based on diluted earnings for the
financial period and the diluted weighted average number of ordinary shares
in issue during the period. Diluted earnings comprise earnings adjusted for
the tax benefit on the conversion of share options by employees and the
weighted average number of ordinary shares adjusted for the dilutive effect
of share options.
(7) Long-term obligations are comprised of medium and long-term borrowings plus
amounts falling due after more than one year related to obligations under
finance leases.
(8) See Note 34 to the consolidated financial statements included in this
prospectus entitled "Summary of principal differences between United Kingdom
and United States generally accepted accounting principles".
10
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS DESCRIBED BELOW, AS WELL AS
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE ACQUIRING ORDINARY
SHARES OR ADSS. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED BY ANY OR ALL OF THESE RISKS.
RISKS RELATED TO OUR BUSINESS
OUR RELIANCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS THAT MAY NOT BE
ADEQUATELY PROTECTED UNDER CURRENT LAWS IN SOME JURISDICTIONS MAY ADVERSELY
AFFECT OUR RESULTS AND OUR ABILITY TO GROW
Our products are largely comprised of intellectual property content
delivered through a variety of media, including newspapers, books, the internet
and television. We rely on trademark, copyright and other intellectual property
laws to establish and protect our proprietary rights in these products. However,
we cannot assure you that our proprietary rights will not be challenged,
invalidated or circumvented. Our intellectual property rights in jurisdictions
such as the US and UK, which are the jurisdictions with the largest proportions
of our operations, are well-established. However, we also conduct business in
other countries where the extent of effective legal protection for intellectual
property rights is uncertain, and this uncertainty could affect our future
growth. Moreover, despite trademark and copyright protection, third parties may
be able to copy, infringe or otherwise profit from our proprietary rights
without our authorization. These unauthorized activities may be more easily
facilitated by the internet.
In addition, the lack of internet-specific legislation relating to trademark
and copyright protection creates an additional challenge for us in protecting
our proprietary rights relating to our online business processes and other
digital technology rights.
WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT THAT IS SUBJECT TO RAPID CHANGE
AND WE MUST CONTINUE TO INVEST AND ADAPT TO REMAIN COMPETITIVE
Our education, business information, book publishing and television
businesses operate in highly competitive markets. These markets continue to
change in response to technological innovations and other factors. We cannot
predict with certainty the changes that may occur and affect the competitiveness
of our businesses. In particular, the means of delivering various of our
products may be subject to rapid technological change. Although we have
undertaken several initiatives to adapt to and benefit from these changes, we
cannot predict whether technological innovations will, in the future, make some
of our products, particularly those printed in traditional formats, wholly or
partially obsolete. If this were to occur, we may be required to invest
significant resources to further adapt to the changing competitive environment.
WE CANNOT ASSURE YOU WHETHER, OR WHEN, OUR SUBSTANTIAL INVESTMENT IN OUR
INTERNET INITIATIVES WILL PRODUCE RETURNS
We are investing, at increasing levels, significant amounts of capital to
develop and promote our internet initiatives. We believe that the success of our
internet initiatives will be an important component of our continued growth. We
can offer no assurance that our internet initiatives will result in revenue
streams developing to the same or a greater extent, or within the same time
frames, as alternative internet initiatives undertaken by our competitors. This
is due to a variety of factors, many of which are beyond our control. These
factors may include:
- the ability of our internet initiatives to achieve leadership positions in
their respective markets,
- competition from comparable and new technologies, and
- the public's acceptance and continued use of the internet.
11
<PAGE>
In addition, as a consequence of our internet and other technological
initiatives, we are increasingly dependent on the performance of the internet
and our systems.
CONSOLIDATION IN THE MARKETS IN WHICH WE OPERATE COULD POTENTIALLY PLACE US AT A
COMPETITIVE DISADVANTAGE
Recently, some of the markets in which we operate have experienced
significant consolidation. In particular, the combinations of traditional media
content companies and new media distribution companies have resulted in new
valuation methods, business models and strategies. We cannot predict with
certainty the extent to which these types of business combinations may occur or
the success that they may achieve. Although we currently have strong positions
in each of our market segments, these combinations could potentially place us at
a competitive disadvantage with respect to scale, resources and our ability to
develop and exploit new media technologies.
PEARSON EDUCATION, OUR LARGEST DIVISION, MAY NOT ACHIEVE CONTINUED GROWTH IN
EMERGING MARKETS DUE TO POLITICAL AND ECONOMIC FORCES BEYOND OUR CONTROL
A variety of factors beyond our control may inhibit the growth of Pearson
Education's operations in the emerging markets of Latin America, Africa, the Far
East and Eastern Europe. These factors include foreign currency exchange rate
risk, regulatory, political or economic conditions in a specific country or
region, trade protection measures and other regulatory requirements and
government spending patterns. Any or all of these factors could have a material
adverse impact on Pearson Education's and our growth and future international
business.
WE MAY NOT BE ABLE TO RETAIN OR ATTRACT THE KEY MANAGEMENT PERSONNEL AND
CREATIVE AND EDITORIAL TALENT THAT WE NEED TO REMAIN COMPETITIVE AND GROW
We operate in a number of highly visible industry segments where there is
intense competition for experienced and highly qualified individuals. Our
successful operations in these segments may increase the market visibility of
members of our management, creative and editorial teams and result in their
being recruited by other businesses.
In searching for new employees and retaining the current employees in our
internet enterprises, such as FT.com, FTYourMoney.com, FTMarketWatch.com and
Pearson Education's internet enterprises, we compete with other technology
companies, including start-up internet companies that may be perceived as
offering significant opportunities to realize wealth. We cannot be certain that
we will successfully attract or retain qualified personnel in the future.
RISKS RELATED TO THE NCS ACQUISITION
THE COMPLETION OF THE NCS ACQUISITION IS NOT A CONDITION TO THE COMPLETION OF
THE RIGHTS OFFERING
The acquisition of NCS is conditioned upon the consummation of the tender
offer, which requires the holders of at least a majority of the outstanding
shares of common stock of NCS to tender their shares. The tender offer is also
conditioned on certain regulatory clearances and other customary matters.
The rights offering is not conditioned upon the acquisition of NCS. In the
unlikely event that the NCS acquisition is not completed, we will consider the
return of a significant portion of the funds raised from the rights offering in
an appropriate manner. However, any such return of funds would be likely to give
rise to tax liabilities for some categories of shareholders. The extent of these
tax liabilities and the categories of shareholders who would be subject to them
would depend on the
12
<PAGE>
means by which we return the funds. As a result, we cannot determine them with
any greater specificity at this time.
WE MAY HAVE TO BORROW FUNDS TO COMPLETE THE NCS ACQUISITION IF THE RIGHTS
OFFERING IS NOT FULLY SUBSCRIBED
Our agreement to acquire NCS is not conditioned upon the completion of the
rights offering. The rights offering is only partially underwritten. If the
share rights and ADS rights are not fully subscribed, we may have to borrow
under our existing credit facility a portion of the funds needed to complete the
NCS acquisition.
WE CANNOT ASSURE YOU THAT WE WILL REALIZE ALL OF THE POTENTIAL BENEFITS OF THE
NCS ACQUISITION
The NCS acquisition will transform Pearson Education into an integrated
education company. We can, however, offer no assurance that we will realize the
potential benefits of this acquisition to the extent and within the time frame
contemplated.
RISKS RELATED TO THE OFFERING
WE CANNOT PREDICT THE EXTENT TO WHICH A MARKET FOR OUR ADSS WILL CONTINUE TO
DEVELOP IN THE US
Our ADSs have been traded over-the-counter in the US and our ordinary shares
are traded on the London Stock Exchange. We intend to list our ADSs on the New
York Stock Exchange. This listing will not, however, guarantee that an active
and liquid trading market for ADSs will develop on the New York Stock Exchange.
The price of our ordinary shares and our ADSs may fluctuate widely, for reasons
including the following:
- the investment community's perception of our prospects in general or the
prospects of one or more of our businesses in particular,
- differences between our actual operating results and those expected by
investors and analysts,
- changes in analysts' recommendations or projections,
- changes in general economic or market conditions and broad market
fluctuations, particularly those affecting the prices of securities of
companies engaged in businesses similar to ours, and
- changes in the exchange rate between sterling and the US dollar.
WE MAY OFFER ADDITIONAL ADSS OR ORDINARY SHARES IN THE FUTURE AND THESE AND
OTHER SALES MAY ADVERSELY AFFECT THE MARKET PRICE OF OUTSTANDING ORDINARY SHARES
AND ADSS
Although we have no current plans for a subsequent offering of ordinary
shares or ADSs, we continually evaluate the capital markets and may offer
additional shares in the future to raise capital or effect acquisitions. In
addition, the granting of ordinary shares and employee stock options is an
integral element of our compensation policies. An additional offering of shares
by us, significant sales of shares by employees, or the public perception that
an offering or sales may occur, could have an adverse effect on the market price
of outstanding ordinary shares and ADSs.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
You should not rely unduly on forward-looking statements in this prospectus.
This prospectus, including the sections entitled "Prospectus Summary", "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business", contains forward-looking statements that
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terms such as "may", "will",
"should", "expect", "intend", "plan", "anticipate", "believe", "estimate",
"predict", "potential", "continue" or the negative of these terms or other
comparable terminology. Examples of these forward-looking statements include,
but are not limited to, statements regarding the following:
- operations and prospects,
- growth strategy,
- potential benefits of the NCS acquisition,
- internet strategy,
- funding needs and financing resources,
- expected financial position,
- market risk,
- debt levels, and
- general market and economic conditions.
These forward-looking statements are only predictions. They involve known
and unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. In
evaluating them, you should consider various factors, including the risks
outlined under "Risk Factors", which may cause actual events or our or our
industry's results to differ materially from those expressed or implied by any
forward-looking statement. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
14
<PAGE>
THE US RIGHTS OFFERING
The US rights offering is a part of our international rights offering. We
will issue ADS rights to subscribe for new ADSs to holders of ADSs and share
rights to subscribe for new ordinary shares to holders of ordinary shares in the
US.
We are sending to holders of ADSs transferable warrants evidencing ADS
rights, instructions relating to the exercise of these ADS rights and this
prospectus. We are sending to each holder of ordinary shares whose registered
address is in the US a transferable provisional allotment letter evidencing
share rights and containing instructions regarding acceptance and payment
procedures and this prospectus. We summarize the procedures for subscription by
holders of ADSs and by holders of ordinary shares below.
As of July 28, 2000, we had 625,270,356 ordinary shares issued and
outstanding and, assuming full subscription, we will have 795,798,634 ordinary
shares issued and outstanding after completion of the rights offering.
Even if all the new ordinary shares offered in the rights offering are not
subscribed for, whether by shareholders, the underwriters or otherwise, we will
allot those ordinary shares which have been subscribed for if the offering
becomes unconditional.
SUBSCRIPTION BY HOLDERS OF ADSS
This section applies to you if you hold ADSs. If you are a holder of
ordinary shares in the US, see "--Subscription by Holders of Ordinary Shares"
below.
The timetable below lists certain important dates relating to the offering
to holders of ADSs. All times referred to are New York City time.
<TABLE>
<S> <C>
Record date for ADS rights--(close of
business in New York City)............... July 28, 2000
ADS warrants sent to eligible ADS
holders.................................. August 9, 2000
Latest time to give instructions to ADS
subscription agent to sell ADS rights.... 5:00 p.m. on August 24, 2000
ADS rights cease trading................... 5:00 p.m. on August 25, 2000
Latest time for exchanging an ADS right for
a share.................................. 5:00 p.m. on August 25, 2000
Latest time to transfer an ADS right....... 5:00 p.m. on August 25, 2000
Latest time for acceptance and payment..... 12:00 noon on August 30, 2000
Expected listing date of ADRs on the New
York Stock Exchange...................... September 1, 2000
New ADRs evidencing new ADSs provided to
holders as soon as practicable after..... October 2, 2000
</TABLE>
The holders of ADSs may subscribe for new ADSs representing new ordinary
shares as follows:
ADS RIGHT RECORD DATE. The record date for determining those holders who
are eligible to participate in the rights offering is the close of business in
New York City on July 28, 2000.
WARRANTS. ADS rights are evidenced by transferable warrants which we will
issue to eligible ADS holders. Every 11 ADSs held of record on the ADS right
record date will entitle the holder to three ADS rights. The holder of one ADS
right is entitled to subscribe for one new ADS at the ADS subscription price.
15
<PAGE>
The warrants are to be issued under the terms of an agreement between us and
The Bank of New York, which is acting as ADS subscription agent. The Bank of New
York is also the depositary for our ADSs. We have filed copies of the deposit
agreement and the rights agency agreement relating to the rights offering
between us and The Bank of New York as exhibits to the registration statement,
and copies are available for inspection at the offices of The Bank of New York
in New York and London.
FRACTIONAL ENTITLEMENTS. We have not allotted ADS rights for fractions of
new ADSs in making the initial allocations of ADS rights to subscribe for new
ADSs. These fractional ADS rights will be aggregated and the related new ADSs
will be sold in the market for your benefit.
ADS SUBSCRIPTION PRICE. The ADS subscription price is the US dollar
equivalent of L10. In addition to this ADS subscription price, you will be
responsible for a 1.5% UK stamp duty reserve tax per ADS right. If you exercise
your ADS rights, you must pay this tax with your subscription price. For
information on how to pay, see "--Method of Subscription and Payment" below.
ADS RIGHT EXPIRATION DATE. ADS rights will expire at 12:00 noon (New York
City time) on August 30, 2000. If unexercised, your ADS rights will be void but
you may receive proceeds from the sale of the new ordinary shares attributable
to your unexercised ADS rights as described under "--Unexercised ADS Rights"
below. We refer to August 30, 2000 as the ADS right expiration date.
ADS SUBSCRIPTION AGENT. The Bank of New York, 101 Barclay Street, New York,
New York 10286, the depositary for ADSs, is acting as ADS subscription agent to
accept subscriptions for new ADSs.
METHOD OF SUBSCRIPTION AND PAYMENT. You can exercise your ADS rights by the
delivery of a properly executed warrant, together with payment in full of the
ADS subscription price, and the applicable UK stamp duty reserve tax, as
follows:
<TABLE>
<S> <C>
- BY MAIL, TO: - BY HAND, EXPRESS MAIL OR OVERNIGHT COURIER, TO:
The Bank of New York The Bank of New York
Tender and Exchange Department Tender and Exchange Department
P.O. Box 11248 101 Barclay Street
Church Street Station Receive and Deliver Window--Street Level
New York, New York 10286-1248 New York, New York 10286
</TABLE>
which must be received no later than 12:00 noon (New York City time) on
August 30, 2000.
The ADS subscription agent has discretion to refuse any improperly completed
or delivered or unexecuted warrant. DEPOSIT IN THE MAIL WILL NOT CONSTITUTE
EFFECTIVE DELIVERY.
You must pay the ADS subscription price in US dollars. The ADS subscription
agent will arrange to convert payments made in US dollars into sterling and pay
the appropriate subscription amount in sterling to us. The payment per new ADS,
which must be paid by a subscriber to the ADS subscription agent in US dollars,
is $16.50. You may pay in US dollars by check, bank draft or postal or express
money order, made payable to "The Bank of New York". In addition, you may pay by
wire transfer to ABA 021000018, Account Number 8900060603, Ref: Pearson plc. The
ADS subscription price will be deemed to have been received by the ADS
subscription agent only upon:
- clearance of any uncertified check,
- receipt by the ADS subscription agent of any certified check, cashier's
check or postal or express money order, or
- receipt by the ADS subscription agent of a wire transfer.
16
<PAGE>
If you pay by uncertified personal check, please note that the funds may take at
least five (5) business days to clear.
The ADS subscription agent will make the conversion from US dollars into
sterling as soon as practicable on or about August 31, 2000 at a commercially
reasonable rate. If there is any excess or deficiency in US dollars as a result
of such conversion, the ADS subscription agent will refund to you the excess
amount without interest in US dollars or bill you for the deficiency, with
interest.
The estimated US dollar ADS subscription price represents a convenience
translation of the sterling subscription price, which has been based on the noon
buying rate on July 28, 2000, rounded upwards to 110% of that rate with the
expectation that after payment of the US dollar equivalent of L10 and the 1.5%
UK stamp duty reserve tax there will be a refund to all subscribers paying in US
dollars. We cannot assure that this will be the case. If your payment in US
dollars, when converted into sterling, is less than the ADS subscription price
in sterling for the number of new ADSs you subscribed for, the ADS subscription
agent will pay the amount of the deficiency to us on your behalf. You will then
be required to pay promptly the amount of such deficiency, including interest
and expenses, and you will not receive new ADSs subscribed for prior to the ADS
subscription agent's receipt of payment. If your payment of a deficiency is not
received by the ADS subscription agent by September 20, 2000, the ADS
subscription agent may sell your new ADSs in an amount sufficient to cover the
amount you owe. In that event, the ADS subscription agent will send you an ADR
representing any remaining new ADSs, together with a check in the amount of the
excess proceeds, if any, from such sale.
If you desire to subscribe and time will not permit your warrant to reach
the ADS subscription agent before the ADS right expiration date, your
subscription will be accepted if, on or before the ADS right expiration date,
the ADS subscription agent has received payment in full of the ADS subscription
price in US dollars and a completed "Notice of Guaranteed Delivery" in the form
provided by the ADS subscription agent. The Notice of Guaranteed Delivery will
require that you state your name and the number of new ADSs subscribed for and
will contain an irrevocable guarantee of an eligible financial institution of
the type specified in the instructions that your properly completed and executed
warrant will be delivered by the eligible financial institution to the ADS
subscription agent prior to 12:00 noon (New York City time) on August 31, 2000.
If the eligible financial institution fails to deliver your properly executed
warrant by 12:00 noon (New York City time) on August 31, 2000, the ADS
subscription agent will return any funds paid by you without interest and your
ADS rights will be treated as unexercised.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of ADS rights will be determined by the ADS subscription agent in
its sole discretion. The ADS subscription agent may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any ADS right.
Warrants will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the ADS
subscription agent determines. Neither we nor the ADS subscription agent has a
duty to give notification of any defect or irregularity in connection with the
submission of warrants or incur any liability for failure to give such
notification.
PARTIAL EXERCISE OF ADS RIGHTS. If you wish to subscribe for a portion of
your new ADSs or to transfer a portion of your ADS rights to more than one
person, you must follow the instructions included with your warrants.
YOUR EXERCISE OF ADS RIGHTS IS IRREVOCABLE AND MAY NOT BE CANCELED OR
MODIFIED.
TRANSFER OF ADS RIGHTS. ADS rights may be exercised, sold or assigned to
others. ADS rights may be bought or sold through banks or brokers.
17
<PAGE>
You may place an order with the ADS subscription agent to sell ADS rights,
whether or not in connection with a subscription. The ADS subscription agent
must receive your order prior to 12:00 noon (New York City time) on August 24,
2000. No ADS right may be sold, assigned or otherwise transferred after 5:00
p.m. (New York City time) on August 25, 2000. If only a portion of the ADS
rights are to be sold by the ADS subscription agent, your warrant must include
instructions as to the action to be taken with respect to your ADS rights that
are not to be sold. The ADS subscription agent's obligation to execute orders is
subject to its ability to find buyers. If buyers cannot be found, ADS rights
that are not sold will be treated as unexercised. The ADS subscription agent
will not be liable to you for its failure to obtain the best market price for
any ADS rights it sells at your request. A check for the proceeds from any ADS
rights sold, net of fees and commissions, will be sent to you by the ADS
subscription agent.
NON-US HOLDERS OF ADSS. We will not mail warrants to holders of ADSs with
record addresses outside the US, including those whose addresses indicate that
they are on military or other government service outside the US. The ADS
subscription agent will hold these warrants for the accounts of the holders who
may, prior to 12:00 noon (New York City time) on August 25, 2000, instruct the
ADS subscription agent in writing as to the disposition of their ADS rights as
described above. In the alternative, non-US holders may, prior to 12:00 noon
(New York City time) on August 30, 2000, instruct the ADS subscription agent in
writing to exercise their ADS rights as described above. If instructions and
payment are not received prior to that time, ADS rights held for these holders
will be treated as unexercised.
ELIGIBILITY. ADS holders with registered addresses in Canada will not be
eligible to exercise their ADS rights. These ADS rights will be treated as
unexercised ADS rights.
UNEXERCISED ADS RIGHTS. The ADS subscription agent will not submit a
provisional allotment letter with respect to share rights relating to
unexercised ADS rights. New ordinary shares provisionally issued and allotted
with respect to unexercised share rights and ADS rights may be sold on behalf of
the unexercising holders through arrangements with the underwriters. If the
ordinary shares are sold at a price in excess of the subscription price and
expenses of sale, any premium will be remitted in sterling pro rata to the
holders of ordinary shares to whom the unsubscribed new ordinary shares have
been provisionally allotted, including The Bank of New York, as ADS depositary.
The Bank of New York will convert these proceeds to US dollars at a commercially
reasonable rate and remit them pro rata to the holders of ADSs to whom the
unsubscribed new ADSs had been provisionally alloted. Neither we nor the
underwriters have any liability to you if ordinary shares respecting unexercised
share rights are not sold, or with respect to the price at which they may be
sold.
DELIVERY OF ADRS. The depositary will provide you an ADR evidencing new
ADSs subscribed for as soon as practicable after October 2, 2000, provided that
you have paid the ADS subscription agent any shortfall arising from the
conversion of a US dollar payment.
RANKING. New ADSs will rank equally in all respects with outstanding ADSs
except that they will not qualify for the interim dividend in respect of the
year ending December 31, 2000, as the new ADSs will be issued after August 11,
2000, the dividend record date.
18
<PAGE>
SUBSCRIPTION BY HOLDERS OF ORDINARY SHARES
This section applies to you if you hold ordinary shares and not ADSs.
The timetable below lists certain important dates relating to the offering
to holders of ordinary shares. All times referred to are London time.
<TABLE>
<S> <C>
Record date for ordinary share rights--(close of
business in London)............................. July 28, 2000
Mailing of provisional allotment letters.......... August 9, 2000
Dealings in new ordinary shares on the London
Stock Exchange expected to commence, unpaid..... 8:00 a.m. on August 10, 2000
Latest time and date for exchanging a share right
for an ADS right................................ 3:00 p.m. on August 25, 2000
Latest time and date for splitting, unpaid........ 3:00 p.m. on August 30, 2000
Latest time and date for acceptance and payment in
full............................................ 3:00 p.m. on September 1, 2000
Dealings in new ordinary shares on the London
Stock Exchange expected to commence, fully
paid............................................ 8:00 a.m. on September 4, 2000
Latest time and date for splitting, fully paid.... 3:00 p.m. on September 14, 2000
Latest time and date for registration of
transfer........................................ 3:00 p.m. on September 18, 2000
Expected date for mailing of definitive share
certificates for new ordinary shares............ October 2, 2000
</TABLE>
The holders of ordinary shares may subscribe for new ordinary shares as
follows:
SHARE RIGHT RECORD DATE. The record date for determination of those holders
of ordinary shares who are eligible to participate in the rights offering is the
close of business in London on July 28, 2000.
PROVISIONAL ALLOTMENT LETTERS. Share rights are evidenced by transferable
provisional allotment letters which we will issue to eligible shareholders.
Every 11 ordinary shares held of record on the share right record date will
entitle the holder to three share rights. The holder of one share right is
entitled to subscribe for one new ordinary share at the share subscription
price.
FRACTIONAL ENTITLEMENTS. We have not allotted share rights for fractions of
new ordinary shares in making the initial allocations of share rights to
subscribe for new ordinary shares. These fractional share rights will be
aggregated and the related new ordinary shares will be sold in the market for
your benefit.
SHARE SUBSCRIPTION PRICE. The share subscription price of L10 is payable to
us in sterling. For information on how to pay, see "--Method of Subscription and
Payment" below.
SHARE RIGHT EXPIRATION DATE. Share rights will expire at 3:00 p.m. (London
time) on September 1, 2000. If unexercised, your share rights will be void but
you may receive proceeds from the sale of the new ordinary shares attributable
to your unexercised share rights as described under "--Unexercised Share Rights"
below. We refer to September 1, 2000 as the share right expiration date.
METHOD OF SUBSCRIPTION AND PAYMENT. Provisional allotment letters will
contain full details regarding acceptance of and payment for some or all of the
new ordinary shares. To subscribe in
19
<PAGE>
whole or in part, you should submit the provisional allotment letter in
accordance with its instructions together with the full amount payable:
<TABLE>
<S> <C>
- BY MAIL OR BY HAND - BY HAND TO:
DURING NORMAL BUSINESS HOURS Lloyds TSB Registrars
WITH OUR RECEIVING AGENT: Antholin House
Lloyds TSB Registrars 71 Queen Street
The Causeway London EC4N 1SL
Worthing, West Sussex BN99 6DA
</TABLE>
which must be received no later than 3:00 p.m. (London time) on September 1,
2000.
We may, in our sole discretion, treat a provisional allotment letter as
valid and binding if it is submitted even if not completed or submitted in
accordance with the relevant instructions or not accompanied by a valid power of
attorney, where required. In addition, we reserve the right, but shall not be
obligated, to treat as valid acceptances in respect of which payments are
received prior to 3:00 p.m. (London time) on September 1, 2000 from an
authorized person, as defined in the UK Financial Services Act 1986, specifying
the new ordinary shares concerned and undertaking to submit the relevant
provisional allotment letter duly completed in due course.
You should make your check and bank drafts payable to "Lloyds TSB Group Plc
A/C Pearson plc" and crossed "A/C Payee only". Payments in sterling must be made
for the full amount by check or bank draft drawn on an account at a bank or
building society in the UK:
- which is a settlement member of the Cheque and Credit Clearing Company
Limited,
- the CHAPS Clearing Company Limited,
- a member of either of the committees of the Scottish or Belfast Clearing
Houses, or
- that has arranged for its checks and bank drafts to be cleared through the
facilities provided by any of those companies or committees.
In all cases, the check or bank draft must bear the appropriate sorting code. We
will not pay interest if your payment is made early. Your submission of the
provisional allotment letter with the appropriate payment in the form of a check
will constitute a warranty that the check will be honored on first presentation.
We may treat dishonored checks as invalid acceptances.
PARTIAL EXERCISE OF SHARE RIGHTS. If you wish to subscribe for a portion of
the new ordinary shares represented by your share rights or to transfer a
portion of your share rights to more than one person, you must follow the
instructions for splitting contained in the provisional allotment letter and
submit the properly completed provisional allotment letter to Lloyds TSB
Registrars at the above address no later than 3:00 p.m. (London time) on
August 30, 2000.
YOUR EXERCISE OF SHARE RIGHTS IS IRREVOCABLE AND MAY NOT BE CANCELLED OR
MODIFIED.
PURCHASE AND SALE OF SHARE RIGHTS AND NEW ORDINARY SHARES. Share rights may
be exercised, sold or transferred to others in accordance with the terms of the
provisional allotment letter. New ordinary shares may be bought or sold through
banks or brokers and will be traded on the London Stock Exchange.
20
<PAGE>
UNEXERCISED SHARE RIGHTS. If payment in full for any new ordinary shares
provisionally allotted has not been received by 3:00 p.m. (London time) on
September 1, 2000, whether from the original allottee or any transferee, the
provisional allotment will be deemed to have been declined, in which event it
will lapse. The new ordinary shares relating to any unexercised share rights may
be sold on your behalf through arrangements with the underwriters, and if they
are sold at a price in excess of the share subscription price and expenses of
sale, any premium will be paid in sterling pro rata to the holders of ordinary
shares to whom the new ordinary shares were provisionally allotted. Neither we
nor the underwriters have any liability to you if ordinary shares respecting
unexercised share rights are not sold, or with respect to the price at which
they may be sold.
DELIVERY OF NEW ORDINARY SHARES. We expect to mail definitive certificates
for new ordinary shares subscribed for pursuant to the exercise of share rights
as soon as practicable after October 2, 2000.
RANKING. New ordinary shares will rank equally in all respects with
outstanding ordinary shares except that they will not qualify for the interim
dividend in respect of the year ending December 31, 2000, as the new ordinary
shares will be issued after the relevant dividend record date.
MONEY LAUNDERING REGULATIONS. Applicable money laundering regulations may
require Lloyds TSB Registrars to establish your identity. These requirements are
referred to below as the "verification of identity requirements". If the
provisional allotment letter is submitted by, and/or payment is made by, a UK
regulated broker or intermediary which is acting as agent and which is itself
subject to the money laundering regulations, any verification of identity
requirements are the responsibility of such broker or intermediary and not
Lloyds TSB Registrars. In this case, the submitting agent's stamp should be
inserted on the provisional allotment letter.
By sending a provisional allotment letter with payment and accepting the
allotment of the new ordinary shares comprised in such provisional allotment
letter, you agree to provide Lloyds TSB Registrars with the information and
other evidence that Lloyds TSB Registrars may require to satisfy the
verification of identity requirements.
If within a reasonable period of time following a request for verification
of your identity, but in any event no later than 3:00 p.m. (London time) on
September 1, 2000, Lloyds TSB Registrars has not received evidence satisfactory
to it, we may treat as invalid your provisional allotment letter, in which event
your provisional allotment will be deemed to have been declined and will lapse.
The money payable on acceptance of the share rights will be returned without
interest to the bank from which it was originally debited. We may proceed
against you to recover any loss or damage suffered or incurred by us as a result
of the failure to produce satisfactory evidence.
IF THE VERIFICATION OF IDENTITY REQUIREMENTS APPLY, YOUR FAILURE TO PROVIDE
THE NECESSARY EVIDENCE OF IDENTITY WITHIN A REASONABLE TIME MAY RESULT IN YOUR
ACCEPTANCE BEING TREATED AS INVALID OR IN DELAYS IN THE MAILING OF A RECEIPTED
PROVISIONAL ALLOTMENT LETTER AND A CERTIFICATE FOR NEW ORDINARY SHARES.
The verification of identity requirements will not usually apply if:
- you are a regulated UK broker or intermediary acting as agent and are
subject to the money laundering regulations,
- you are an organization required to comply with the Money Laundering
Directive (the Council Directive on prevention of the use of the financial
system for the purpose of money laundering (91/308/EEC)),
- you make payment by way of a check drawn on an account in your name, or
21
<PAGE>
- the aggregate share subscription price for the relevant new ordinary
shares is less than the equivalent of euro 15,000.
In other cases, the identity requirements may apply and you may facilitate
the satisfaction of these requirements in the following ways:
- if you make payment by building society check not drawn on your account or
a bank draft, by the building society or bank endorsing on the check or
draft your name and the number of your account at such building society or
bank, such endorsement being validated by a stamp and authorized
signature,
- if you do not make payment by check drawn on your account and the first
bullet point of the preceding paragraph does not apply, by you including
with your provisional allotment letter evidence of your name and address
from an appropriate third party; for example, a recent bill from a gas,
electricity or telephone company or a bank statement, in each case bearing
your name and address; originals of such documents, not copies, are
required; and such documents will be returned in due course, or
- if the provisional allotment letter is submitted with payment by an agent
which is an organization of the kind referred to in the first bullet point
above or which is subject to anti-money laundering regulation in a country
that is a member of the Financial Action Task Force, the non-European
Union members of which are Australia, Canada, Hong Kong, Iceland, Japan,
New Zealand, Norway, Singapore, Switzerland, Turkey and the US, the agent
should provide written confirmation that it has that status with the
provisional allotment letter and written assurances that it has obtained
and recorded evidence of the identity of the persons for whom it acts and
that it will, on demand, make such evidence available to Lloyds TSB
Registrars or the relevant authority.
If your provisional allotment letter involves an aggregate share
subscription price of the equivalent of euro 15,000 or more and is submitted by
hand by you in person, you should ensure that you can provide evidence of your
identity bearing your photograph such as your passport and evidence of your
address.
Neither we nor Lloyds TSB Registrars shall be responsible for or have any
liability for any loss or damage, whether actual or alleged, arising from the
treatment of a provisional allotment letter as invalid or the termination of
your share rights in the rights offering as a result of Lloyds TSB Registrars
not having received from you evidence as to your identity within a reasonable
period, but no later than 3:00 p.m. (London time) on September 1, 2000.
EXCHANGE PRIVILEGE
EXCHANGE OF ADS RIGHTS FOR SHARE RIGHTS. At any time prior to 5:00 p.m.
(New York City time) on August 25, 2000, you may surrender a warrant
representing ADS rights to the ADS subscription agent at its New York office and
the ADS subscription agent will deliver to you or your assignee at its office at
One Canada Square, London EI4 5AL, England, a provisional allotment letter
representing share rights to subscribe for the appropriate number of new
ordinary shares at the issue price.
EXCHANGE OF SHARE RIGHTS FOR ADS RIGHTS. At any time prior to 3:00 p.m.
(London time) on August 25, 2000, you may surrender a provisional allotment
letter representing any amount of share rights to the ADS subscription agent at
its New York or London offices and the ADS subscription agent will deliver to
you or your assignee at its New York office a warrant representing ADS rights in
an amount sufficient to subscribe for the appropriate number of new ADSs covered
by such provisional allotment letter.
22
<PAGE>
If you deposit a warrant or a provisional allotment letter pursuant to the
exchange privilege, you must pay any associated taxes or levies and depositary
fees. If you deposit a provisional allotment letter pursuant to the exchange
privilege, you will be charged 1.5% of the issue price per new ordinary share so
deposited to meet the stamp duty reserve tax payable on the exercise of the ADS
rights obtained in the rights offering.
SHARE PLANS
In the case of our share option plans, we will adjust the number of ordinary
shares underlying outstanding options and/or the option exercise price to take
account of the rights offering, in such manner as we may decide. This adjustment
will be subject to prior confirmation of our auditors that the adjustments are
fair and reasonable and, where relevant, to the prior approval of the UK Inland
Revenue and to compliance with tax legislation. We will make similar adjustments
under those plans which involve stock appreciation rights, and notify
participants of such adjustments in due course.
Participants in the FT Group's employee share scheme and the Pearson profit
sharing plan, on whose behalf ordinary shares are held by a trustee, will be
entitled to participate in the rights offering in respect of the ordinary shares
held on their behalf.
Participants in the Pearson share bonus plan, on whose behalf ordinary
shares allocated to them under the plan are held by a trustee, will have
additional ordinary shares credited to their holding and/or will receive cash in
respect of any fractional entitlement.
23
<PAGE>
NCS ACQUISITION
On July 30, 2000, we and a wholly owned subsidiary entered into an Agreement
and Plan of Merger, which was amended as of August 4, 2000, with NCS. In
accordance with the merger agreement, our subsidiary will make a cash tender
offer for all of the issued and outstanding shares of NCS's common stock no
later than August 7, 2000 at a price per share of $73. NCS's board of directors
has recommended that the shareholders accept the tender offer. We will keep the
tender offer open for 23 business days and may, under certain circumstances,
extend it for additional periods.
The tender offer is conditioned upon the tender of at least a majority of
the outstanding NCS common stock on a fully diluted basis and other customary
conditions.
Following completion of the tender offer, NCS will merge with our
subsidiary, and each share of NCS common stock not tendered in the tender offer
shall be converted into the right to receive $73, subject to dissenters' rights
provided under Minnesota law. If at least ninety (90%) percent of the
outstanding shares of NCS common stock are tendered, the merger can take place
promptly without a shareholders' meeting. If, however, less than ninety (90%)
percent of the outstanding shares of NCS common stock are tendered in the tender
offer, Minnesota law requires that there be a shareholders' meeting to approve
the merger. As we will then own a majority of the outstanding shares of NCS
common stock, this meeting would be a mere formality. Those shareholders who do
not tender their shares of NCS common stock and do not approve the merger will
be entitled to exercise dissenters' rights in accordance with Minnesota law,
which entitle them to receive payment for the shares at an appraised fair value.
The merger agreement contains standard representations and warranties by NCS
and limitations on how NCS may conduct its business prior to the closing of the
merger. The merger agreement allows the NCS board of directors to consider
takeover proposals from third parties where it would be a breach of the
fiduciary duty of the NCS board of directors to fail to consider them. The NCS
board of directors may also withdraw its recommendation of our acquisition in
favor of a superior takeover proposal. In that event, we may terminate the
merger agreement and receive a termination fee in the amount of $98 million. We
will also be entitled to the termination fee if, among other things, the merger
agreement is terminated as a result of NCS's breach in any material respect of
any of its representations or failure to perform in any material respect its
covenants.
24
<PAGE>
USE OF PROCEEDS
Assuming the rights are exercised in full, we estimate that the net proceeds
to us from this offering will be approximately $2.5 billion, after deducting
estimated expenses related to the offering. We intend to use the net proceeds to
finance the NCS acquisition.
MARKET INFORMATION
The principal trading market for our ordinary shares is the London Stock
Exchange. Our ordinary shares also trade in the US in the form of ADSs evidenced
by ADRs under a sponsored ADR facility with The Bank of New York, as depositary.
We established this facility in March 1995. Each ADS represents one ordinary
share. We do not believe, however, that our ADSs are actively traded in the
over-the-counter market.
We will apply to list the ADRs evidencing ADSs on the New York Stock
Exchange under the symbol "PSO".
The following table sets forth the highest and lowest middle market
quotations, which represent the average of closing bid and asked prices, for the
ordinary shares, as derived from the Daily Official List of the London Stock
Exchange:
- on an annual basis for our five most recent fiscal years,
- on a quarterly basis for our two most recent quarters and our two most
recent fiscal years, and
- on a monthly basis for the most recent six months.
<TABLE>
<CAPTION>
ORDINARY AVERAGE
SHARES TRADING
(IN PENCE) VOLUME
------------------- (ORDINARY
REFERENCE PERIOD HIGH LOW SHARES)
---------------- -------- -------- ----------
<S> <C> <C> <C>
FIVE MOST RECENT FISCAL YEARS
1999........................................................ 2004 1173 1,910,696
1998........................................................ 1200 762 1,779,335
1997........................................................ 848 665 1,711,711
1996........................................................ 760 601 1,373,446
1995........................................................ 684 543 1,390,806
</TABLE>
MOST RECENT QUARTERS AND TWO MOST RECENT FISCAL YEARS
<TABLE>
<C> <S> <C> <C> <C>
2000: Second quarter............................................. 2360 1649 2,005,332
First quarter.............................................. 2578 1701 2,343,852
1999: Fourth quarter............................................. 2004 1291 1,831,844
Third quarter.............................................. 1368 1216 1,636,981
Second quarter............................................. 1405 1190 2,078,271
First quarter.............................................. 1431 1173 2,109,696
1998: Fourth quarter............................................. 1193 875 2,088,696
Third quarter.............................................. 1200 945 1,668,757
Second quarter............................................. 1186 929 1,658,958
First quarter.............................................. 1001 762 1,703,522
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MOST RECENT SIX MONTHS
July........................................................ 2079 1948 2,431,075
June........................................................ 2245 1990 1,695,026
May......................................................... 2334 1646 1,951,603
April....................................................... 2359 1863 2,447,280
March....................................................... 2578 2061 2,116,859
February.................................................... 2464 1934 2,369,018
</TABLE>
25
<PAGE>
DIVIDENDS
We pay dividends to holders of ordinary shares on dates that are fixed in
accordance with the guidelines of the London Stock Exchange. Our board of
directors normally declares an interim dividend in August of each year to be
paid in November. Our board of directors normally recommends a final dividend
following the end of the fiscal year to which it relates, to be paid in the
following June, subject to shareholders' approval at our annual general meeting.
Our board of directors declared an interim dividend in respect of the year
ending December 31, 2000 of 9.2 pence per ordinary share. This dividend will be
payable on October 27, 2000 to shareholders and ADS holders of record on
August 11, 2000. New ordinary shares and new ADSs issued in the rights offering
will not be entitled to this dividend as these ordinary shares and ADSs will be
issued after the record date.
The table below sets forth the amounts of interim, final and total dividends
paid in respect of each fiscal year indicated, and is translated into cents per
ordinary share at the noon buying rate in The City of New York on each of the
respective payment dates for interim and final dividends.
<TABLE>
<CAPTION>
PENCE PER ORDINARY CENTS PER ORDINARY
SHARE SHARE
------------------------------ ------------------------------
FISCAL YEAR INTERIM FINAL TOTAL INTERIM FINAL TOTAL
----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1999........................................ 8.6 13.9 22.5 14.1 21.0 35.1
1998........................................ 8.0 13.0 21.0 13.4 20.9 34.3
1997........................................ 7.5 12.0 19.5 12.6 19.7 32.3
1996........................................ 6.9 11.1 18.0 11.7 18.1 29.8
1995........................................ 6.325 10.175 16.5 10.0 15.7 25.7
</TABLE>
Future dividends will be dependent on our future earnings, financial
condition and cash flow, as well as other factors affecting us. We currently
intend to reduce future dividend payments per share, pro rata, to take account
of the rights offering.
26
<PAGE>
CAPITALIZATION
The following table shows our capitalization and indebtedness as of
June 30, 2000, and as adjusted to reflect the full subscription of the rights
offering and the use of the proceeds to finance the NCS acquisition. This table
should be read in conjunction with our interim results for the six months to
June 30, 2000 (unaudited) and the related notes appearing elsewhere in this
prospectus. We have prepared the financial information in accordance with UK
GAAP, which differs in significant respects from US GAAP. We describe these
differences in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Accounting Principles" and Note 34 to our consolidated
financial statements. Borrowings, cash and liquid resources denominated in
currencies other than sterling have been translated into sterling at the
exchange rates in effect on June 30, 2000, the most significant of which is US
dollars, which has been translated at a rate of L1.00=$1.51. The convenience
translation of sterling amounts into US dollars has been made at the same
exchange rate.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------
ACTUAL AS ADJUSTED
------------------- -------------------
LM $M LM $M
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and liquid resources.................................... 369 557 369 557
===== ====== ====== ======
<CAPTION>
LM $M LM $M
INDEBTEDNESS:
<S> <C> <C> <C> <C> <C>
Short-term borrowings........................................ 902 1,362 902 1,362
Medium and long-term borrowings.............................. 2,011 3,036 2,011 3,036
----- ------ ------ ------
Total borrowings........................................... 2,913 4,398 2,913 4,398
----- ------ ------ ------
SHAREHOLDERS' FUNDS:
Ordinary shares
authorized: 916,000,000
issued: 625,222,933 (actual); 795,751,211 (as adjusted).... 156 236 199 300
Share premium account........................................ 774 1,169 2,437 3,680
Consolidated reserves........................................ 901 1,360 901 1,360
----- ------ ------ ------
Total shareholders' funds.................................. 1,831 2,765 3,537 5,340
MINORITY INTERESTS........................................... 113 171 113 171
----- ------ ------ ------
Total capitalization......................................... 4,857 7,334 6,563 9,909
===== ====== ====== ======
</TABLE>
At June 30, 2000, we had no secured debt outstanding. Obligations under finance
leases, which are not included in the table of indebtedness above, amounted to
L22 million as at June 30, 2000.
On April 7, 2000, we and Bertelsmann AG and GBL/Electrafina announced the
intention to combine Pearson Television and CLT-Ufa, the television and
broadcasting business owned by Germany's Bertelsmann, into Belgium's Audiofina
to form an integrated commercial television and radio broadcast and content
group, renamed the RTL Group. In this transaction, which closed on July 25,
2000, we contributed the net assets of Pearson Television, adjusted for cash
retained by us in the amount of euros 84 million (L53 million), to the RTL Group
in exchange for a 22% equity stake in the RTL Group. The capitalization table
takes no account of the effect of this transaction.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The table on the following page shows selected consolidated financial data
for each of the years in the five-year period ended December 31, 1999. The
selected consolidated profit and loss account data for the years ended
December 31, 1999, 1998 and 1997, and the selected consolidated balance sheet
data as at December 31, 1999 and 1998, have been derived from our consolidated
financial statements included elsewhere in this prospectus, which have been
audited by PricewaterhouseCoopers, independent chartered accountants. The
selected consolidated profit and loss account data for the years ended
December 31, 1996 and 1995, and the selected consolidated balance sheet data as
at December 31, 1997, 1996 and 1995, have been derived from our audited
consolidated financial statements for those periods and as of those dates, which
are not included in this prospectus. The selected consolidated profit and loss
account data for the six month periods ending June 30, 2000 and June 30, 1999
and the selected consolidated balance sheet data as of June 30, 2000, have been
derived from our unaudited interim results for the six months to June 30, 2000,
included elsewhere in this prospectus. These unaudited financial statements have
been prepared on the same basis as our audited financial statements and, in the
opinion of management, include all material adjustments, consisting only of
normal recurring adjustments, necessary to present the financial position and
results of operations for the periods and dates presented. Interim results are
not necessarily indicative of the results that may be expected for any other
interim period or for the full year. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes appearing elsewhere in this prospectus.
Our consolidated financial statements have been prepared in accordance with
UK GAAP, which differs from US GAAP in significant respects. The consolidated
financial statements contain a reconciliation to US GAAP of profit for the
financial year, shareholders' funds and certain other financial data. The
information provided below is not necessarily indicative of the results that may
be expected from future operations. For convenience, we have translated the
June 30, 2000 and December 31, 1999 amounts into US dollars at the rate of
L1.00=$1.51, the noon buying rate in The City of New York on June 30, 2000.
28
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31
------------------------------------------ -----------------------------------------
2000 2000 1999 1999 1999 1998 1997
-------- -------------- -------------- -------- -------- -------- --------
$M LM LM $M LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C>
UK GAAP INFORMATION:
CONSOLIDATED PROFIT AND LOSS
ACCOUNT DATA
Total sales...................... 2,333 1,545 1,306 5,031 3,332 2,395 2,293
Total sales from continuing
operations..................... 2,333 1,545 1,306 5,031 3,332 2,251 2,011
Operating profit from continuing
operations(1).................. (29) (19) 25 408 270 187 252
Total operating profit........... (17) (11) 46 480 318 250 328
Profit after taxation............ 137 91 (38) 453 300 441 40
Operating profit before internet
enterprises, goodwill
amortization and other
items(2)....................... 236 156 133 888 588 389 328
Earnings per equity share(3)..... 21.4 CENTS 14.2p (6.6)p 72.8 CENTS 48.2p 74.1p 6.6p
Adjusted earnings per equity
share after internet
enterprises(4)................. (0.9) (0.6) 6.3 73.2 48.5 42.0 34.9
Adjusted earnings per equity
share before internet
enterprises(5)................. 15.1 10.0 7.1 80.5 53.3 42.0 34.9
Diluted earnings per equity
share(6)....................... 20.8 13.8 (6.5) 71.7 47.5 73.3 6.4
CONSOLIDATED BALANCE SHEET DATA $M LM LM $M LM LM LM
Total assets (Fixed Assets plus
Current Assets)................ 9,817 6,501 5,447 8,079 5,350 5,317 2,253
Net assets....................... 2,935 1,944 1,107 2,004 1,327 1,084 156
Long-term obligations(7)......... 3,059 2,026 2,312 3,452 2,286 2,562 609
Capital Stock.................... 236 156 153 231 153 152 144
Number of equity shares
outstanding.................... 625 625 611 613 613 610 577
<CAPTION>
DECEMBER 31
-------------------
1996 1995
-------- --------
LM LM
<S> <C> <C>
UK GAAP INFORMATION:
CONSOLIDATED PROFIT AND LOSS
ACCOUNT DATA
Total sales...................... 2,186 1,830
Total sales from continuing
operations..................... 1,830 1,484
Operating profit from continuing
operations(1).................. 132 192
Total operating profit........... 189 267
Profit after taxation............ 248 272
Operating profit before internet
enterprises, goodwill
amortization and other
items(2)....................... 289 267
Earnings per equity share(3)..... 42.8p 47.1p
Adjusted earnings per equity
share after internet
enterprises(4)................. 30.6 28.8
Adjusted earnings per equity
share before internet
enterprises(5)................. 30.6 28.8
Diluted earnings per equity
share(6)....................... 42.5 46.4
CONSOLIDATED BALANCE SHEET DATA LM LM
Total assets (Fixed Assets plus
Current Assets)................ 2,246 2,568
Net assets....................... 393 856
Long-term obligations(7)......... 556 475
Capital Stock.................... 143 139
Number of equity shares
outstanding.................... 571 556
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1999 1998
-------- -------- --------
$M LM LM
<S> <C> <C> <C>
US GAAP INFORMATION:(8)
Profit for the financial year............................... 299 198 444
Profit from continuing operations for the financial year.... 254 168 122
Basic earnings per equity share............................. 48.9 CENTS 32.4p 75.3p
Diluted earnings per equity share........................... 48.5 32.1 74.6
Basic earnings from continuing operations per equity
share..................................................... 41.5 27.5 20.7
Diluted earnings from continuing operations per equity
share..................................................... 41.1 27.2 20.5
$M LM LM
Shareholders' funds......................................... 3,949 2,615 2,468
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
29
<PAGE>
------------------------------
(1) Continuing operations represent those operations carried on by us as at
June 30, 2000. Operating profit from continuing operations consists of
operating profit--Group, plus the Group's share of operating profit from
continuing operations for Group associates, as disclosed on page F-3 of the
consolidated profit and loss account.
(2) Other items include a L100 million charge for Penguin improper accounting in
1996 and Year 2000 compliance costs of L5 million in 1999 and L7 million in
1998, and integration costs in connection with our acquisition of Simon &
Schuster's educational, business & professional and reference publishing
business of L95 million in 1999 and L120 million in 1998 and in connection
with our acquisition of DK of L3 million in the first six months of 2000.
(3) Earnings per equity share is based on profit for the financial period and
the weighted average number of ordinary shares in issue during the period.
(4) Adjusted earnings per equity share is based on adjusted earnings for the
financial period and the weighted average number of ordinary shares in issue
during the period. Adjusted earnings excludes profits or losses on the sale
of fixed assets and investments, businesses and associates, Year 2000
compliance costs and integration costs in respect of the Simon & Schuster
acquisition and the DK acquisition and, following the prospective
implementation of FRS10 "Goodwill and Intangible Assets" in 1998, goodwill
amortization. In 1996, the L100 million exceptional charge for improper
accounting in Penguin and the loan stock redemption premium have also been
excluded. In the first six months of 2000, the accelerated amortization of a
financing arrangement fee has also been excluded.
(5) Due to expenditures of L84 million in the first six months of 2000 and L39
million in 1999 on new internet enterprises, a second adjusted earnings per
equity share in accordance with UK GAAP is presented in which the results of
these internet enterprises are also excluded from earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General Overview--Internet Enterprises".
(6) Diluted earnings per equity share is based on diluted earnings for the
financial period and the diluted weighted average number of ordinary shares
in issue during the period. Diluted earnings comprise earnings adjusted for
the tax benefit on the conversion of share options by employees and the
weighted average number of ordinary shares adjusted for the dilutive effect
of share options.
(7) Long-term obligations are comprised of medium and long-term borrowings plus
amounts falling due after more than one year related to obligations under
finance leases.
(8) See Note 34 to the consolidated financial statements included in this
prospectus entitled "Summary of principal differences between United Kingdom
and United States generally accepted accounting principles".
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON AND SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE RELATED
NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE FINANCIAL STATEMENTS HAVE
BEEN PREPARED IN ACCORDANCE WITH UK GAAP, WHICH DIFFERS IN SIGNIFICANT RESPECTS
FROM US GAAP. NOTE 34 TO OUR CONSOLIDATED FINANCIAL STATEMENTS PROVIDES A
DESCRIPTION OF THE SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP AS THEY
RELATE TO OUR BUSINESS AND PROVIDES A RECONCILIATION TO US GAAP.
GENERAL OVERVIEW
SALES INFORMATION BY OPERATING DIVISION
The following table shows sales information for each of the periods
specified broken out by operating division:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
--------------------------------- ---------------------------------------------
2000 1999 1999 1998 1997
------------- ------------- ------------- ------------- -------------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
Pearson Education............................. 647 554 1,725 702 563
FT Group...................................... 408 330 687 683 676
The Penguin Group............................. 326 263 565 523 525
Pearson Television............................ 164 159 355 343 247
------------- ------------- ------------- ------------- -------------
Continuing operations......................... 1,545 1,306 3,332 2,251 2,011
Discontinued operations....................... -- -- -- 144 282
------------- ------------- ------------- ------------- -------------
1,545 1,306 3,332 2,395 2,293
</TABLE>
SALES INFORMATION BY GEOGRAPHIC MARKET SUPPLIED
The following table shows sales information for each of the periods
specified broken out by geographic region:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
LM LM LM
<S> <C> <C> <C>
United Kingdom.............................................. 544 497 487
Continental Europe.......................................... 518 461 382
North America............................................... 1,990 1,078 916
Asia Pacific................................................ 200 161 179
Rest of World............................................... 80 54 47
------------- ------------- -------------
Continuing operations....................................... 3,332 2,251 2,011
Discontinued operations..................................... -- 144 282
------------- ------------- -------------
3,332 2,395 2,293
</TABLE>
Sales information by geographic market supplied is not available for the six
months ended June 30, 2000.
INTERNET ENTERPRISES
We refer to our discrete internet operations as our internet enterprises.
These are significant internet ventures whose activities and results are able to
be separately identified from their print-and television-based counterparts. Due
to a significant level of expenditure in 1999 on new internet
31
<PAGE>
enterprises, we commenced in 1999 reporting our operating profit and earnings
per equity share before and after internet enterprises, as well as before
goodwill amortization and other items. This presentation is in accordance with
UK GAAP.
EXCHANGE RATE FLUCTUATIONS
We earn a significant proportion of our sales and profits in overseas
currencies, principally the US dollar, and, to a lesser extent, the euro. Sales
and profits are translated into sterling in our consolidated financial
statements using average rates. The average rate used for the US dollar was
$1.56 for the six months ended June 30, 2000, $1.61 for the six months ended
June 30, 1999, $1.61 in 1999, $1.66 in 1998 and $1.63 in 1997.
UK GAAP AND US GAAP
We prepare our financial statements in accordance with UK GAAP, which
differs in significant respects from US GAAP. Our profit for the financial year
ended December 31, 1999 under UK GAAP was L294 million compared with profit of
L198 million under US GAAP. The profit for the financial year ended
December 31, 1998 under UK GAAP was L437 million, compared with profit of
L444 million under US GAAP. Equity shareholders' funds at December 31, 1999
under UK GAAP were L1,321 million compared with L2,615 million under US GAAP.
Equity shareholders' funds at December 31, 1998 under UK GAAP were
L1,048 million compared with L2,468 million under US GAAP. The main differences
between UK GAAP and US GAAP relate to goodwill and intangible assets, deferred
taxation, acquisition adjustments, derivatives, pensions and stock based
compensation, and are discussed in further detail under "--Accounting
Principles". In accordance with UK GAAP, we report operating profit and earnings
per equity share before and after internet enterprises, goodwill amortization
and other items. Under UK GAAP, intangible assets are not separately identified
from goodwill.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30,1999
CONSOLIDATED
SALES. Our total sales, all from continuing operations, increased by
L239 million, or 18%, to L1,545 million in the six months ended June 30, 2000,
from L1,306 million in the six months ended June 30, 1999. This increase was
primarily due to increased sales realized at Pearson Education, the FT Group and
the Penguin Group.
Pearson Education continued to be our largest business sector in sales terms
in the first six months of 2000. Sales at Pearson Education accounted for 42% of
our total sales in the first six months of 2000, and 42% in the six months ended
June 30, 1999.
OPERATING PROFIT. Our total operating profit decreased by L57 million to a
loss of L11 million in the six months ended June 30, 2000, from a profit of
L46 million in the six months ended June 30, 1999. However, our operating profit
before internet enterprises, goodwill amortization and other items increased by
L23 million, or 17%, to L156 million in the six months ended June 30, 2000, from
L133 million in the six months ended June 30, 1999. This increase in operating
profit was primarily due to a decrease in losses realized at Pearson Education
and increased profit realized at the FT Group.
- Operating loss before internet enterprises, goodwill amortization and
other items attributable to Pearson Education decreased by L12 million, or
32%, to L26 million in the six months ended June 30, 2000, from
L38 million in the six months ended June 30, 1999, primarily due to a
decrease in the loss in the US Schools business.
32
<PAGE>
- Operating profit before internet enterprises, goodwill amortization and
other items attributable to the FT Group increased by L23 million, or 27%,
to L109 million in the six months ended June 30, 2000, from L86 million in
the six months ended June 30, 1999, primarily due to increases in
advertising at the FINANCIAL TIMES and LES ECHOS newspapers and increases
at FT Interactive Data due to the acquisition of the Thompson Financial
Securities business in July 1999 and the acquisition of a controlling
interest in Data Broadcasting Corporation in February 2000.
Our trading margin, which measures the ratio of trading profit, excluding
income from investments and associates and losses from internet enterprises, to
sales, increased to 9% in the six months ended June 30, 2000, from 7% in the six
months ended June 30, 1999, primarily due to our continued effort to decrease
overall costs as a percentage of sales.
GOODWILL AMORTIZATION AND OTHER ITEMS. Goodwill amortization increased by
L9 million to L72 million in the six months ended June 30, 2000, from
L63 million in the six months ended June 30, 1999, primarily due to the
acquisition of the Thompson Financial Securities business in July 1999. This
acquisition resulted in six months of goodwill amortization being included in
the figures for the six months ended June 30, 2000 and no amortization being
included in the figures for the six months ended June 30, 1999. Other items
decreased by L6 million, or 35%, to L11 million in the six months ended
June 30, 2000, from L17 million in the six months ended June 30, 1999. Other
items comprise a charge in respect of the integration of the businesses acquired
from Simon & Schuster which decreased by L7 million, or 47%, to L8 million in
the six months ended June 30, 2000, from L15 million in the six months ended
June 30, 1999 and a L3 million charge in respect of the integration of DK which
was acquired in May 2000. In addition, other items included a L2 million charge
in respect of Year 2000 compliance costs in the six months ended June 30, 1999.
NON-OPERATING ITEMS. Profit before taxation on the sale of fixed assets,
investments, businesses and associates was L218 million in the six months ended
June 30, 2000, compared to L5 million in the six months ended June 30, 1999.
Taxation on these items was L31 million in the six months ended June 30, 2000,
and L6 million in the six months ended June 30, 1999. In the six months ended
June 30, 2000, the most significant item was a profit of L231 million on the
sale of our interest in the Lazard Houses. In the six months ended June 30,
1999, the most significant items were a profit of L16 million on the sale of
part of our interest in BSB Holdings Ltd and a loss of L16 million on the sale
of our Extel research products business.
NET FINANCE COSTS. Our total net finance costs increased by L13 million, or
18%, to L84 million in the six months ended June 30, 2000, from L71 million in
the six months ended June 30, 1999, primarily due to the acceleration of the
amortization of an arrangement fee in respect of a borrowing facility which was
redeemed early. In the six months ended June 30, 2000, our average net debt
decreased by L430 million compared to the six months ended June 30, 1999. The
decrease in net debt reflected the impact of the equity and asset disposal
proceeds received in the six months ended June 30, 2000. However, this decrease
in debt was partially offset by an increase in the average interest rate paid.
Our net interest rate payable averaged approximately 6.7% in the six months
ended June 30, 2000. This interest rate was higher than in the six months ended
June 30, 1999, when it was 5.9%, mainly due to a change in market interest
rates. For a more detailed discussion of our interest expenses, see
"--Quantitative and Qualitative Disclosures about Market Risk". The effect of
interest rate increases on us was also mitigated by our existing portfolio of
interest rate swaps, which converted over half of our variable rate commercial
paper and bank debt to a fixed rate basis.
TAXATION. The taxation charge was L32 million in the six months ended
June 30, 2000, compared to L18 million in the six months ended June 30, 1999.
The taxation charge was 26% of
33
<PAGE>
profit before taxation in the six months ended June 30, 2000. In the six months
ended June 30, 1999, the taxation charge of L18 million was in respect of a loss
before taxation of L20 million. In the six months ended June 30, 2000, a
significant proportion of the goodwill amortization was not eligible for
taxation relief but was largely offset by the taxation on the profit on the sale
of the Lazard Houses being lower than the statutory rate. In the six months
ended June 30, 1999, a significant proportion of the goodwill amortization was
also not eligible for taxation relief and, in addition, only limited taxation
relief was recognized on the Simon & Schuster integration costs.
The taxation rate on adjusted earnings, as defined below, remained at 25% in
the six months ended June 30, 2000, compared to 25% in the six months ended
June 30, 1999. The difference of 5% between the UK statutory taxation rate in
the six months ended June 30, 2000, which was 30%, and the effective taxation
rate on adjusted earnings in the six months ended June 30, 2000, which was 25%,
is primarily due to the availability of tax losses in the US.
PROFIT. Profit for the financial period increased by L129 million to
L88 million in the six months ended June 30, 2000, from a loss of L41 million in
the six months ended June 30, 1999, primarily due to the increase in profits on
the sale of businesses and associates.
EARNINGS PER ORDINARY SHARE. Earnings per ordinary share, which reflect
earnings divided by the weighted average number of shares in issue increased to
14.2 pence in the six months ended June 30, 2000, from a loss of 6.6 pence in
the six months ended June 30, 1999 based on a weighted average number of shares
of 620.4 million in the six months ended June 30, 2000, and 609.7 million in the
six months ended June 30, 1999. This increase was primarily due to the increase
in profits on the sale of businesses and associates. Adjusted earnings per
ordinary share decreased to a loss of 0.6 pence in the six months ended
June 30, 2000, from earnings of 6.3 pence in the six months ended June 30, 1999.
Adjusted earnings exclude the profits or losses on the sale of fixed assets and
investments, businesses and associates, Year 2000 compliance costs, integration
costs in respect of the Simon & Schuster acquisition and the DK acquisition,
goodwill amortization and the accelerated amortization of a financing
arrangement fee. Adjusted earnings before internet enterprises per ordinary
share increased to 10.0 pence in the six months ended June 30, 2000, from 7.1
pence in the six months ended June 30, 1999. Adjusted earnings before internet
enterprises excludes the above-mentioned items and also excludes the losses
arising on internet enterprises. Diluted earnings per ordinary share increased
to 13.8 pence in the six months ended June 30, 2000, from a loss of 6.5 pence in
the six months ended June 30, 1999, primarily due to the increase in profits on
the sale of businesses and associates. Earnings dilution included the tax
benefit on the conversion of certain share options by employees and, after
taking into account the effect of dilutive share options, the weighted average
number of ordinary shares applicable was 628.6 million in the six months ended
June 30, 2000 and 616.5 million in the six months ended June 30, 1999.
34
<PAGE>
OPERATING PROFIT BY DIVISION
The following table summarizes our operating profit by division.
<TABLE>
<CAPTION>
OPERATING PROFIT AFTER INTERNET
OPERATING PROFIT BEFORE INTERNET ENTERPRISES, GOODWILL
ENTERPRISES, GOODWILL AMORTIZATION AND AMORTIZATION AND
OTHER ITEMS OTHER ITEMS
----------------------------------------- -------------------------------
SIX MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------------------- -------------------------------
2000 2000 1999 1999 2000 1999
LM % LM % LM LM
-------- -------- -------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Pearson Education.............. (26) (18) (38) (34) (108) (116)
FT Group....................... 109 74 86 77 35 77
The Penguin Group.............. 33 22 31 28 25 31
Pearson Television............. 32 22 33 29 29 33
---- ---- ---- ---- ---- ----
Continuing Operations.......... 148 100 112 100 (19) 25
</TABLE>
PEARSON EDUCATION
Pearson Education's sales increased by L93 million, or 17%, to L647 million
in the six months ended June 30, 2000, from L554 million in the six months ended
June 30, 1999, principally due to increases in the US Schools business. Pearson
Education's sales in the six months ended June 30, 2000 comprised 42% of our
total sales.
Pearson Education realizes approximately two-thirds of its sales and all of
its profits in the second half of the year when it makes the majority of its
sales.
Operating loss before internet enterprises, goodwill amortization and other
items decreased by L12 million, or 32%, to L26 million in the six months ended
June 30, 2000, from L38 million in the six months ended June 30, 1999. This
decrease in operating loss was primarily due to decreases in the operating loss
realized in the US Schools business.
The US Schools business increased sales by L35 million, or 19%, to
L222 million in the six months ended June 30, 2000, from L187 million in the six
months ended June 30, 1999. This increase in sales was primarily due to gains in
market share for our reading, literature and electronic programs as well as the
continued success of our math program.
The US Higher Education and Professional Publishing business increased sales
by L37 million, or 21%, to L215 million in the six months ended June 30, 2000,
from L178 million in the six months ended June 30, 1999. This increase in sales
was primarily due to an increase in sales in the US College publishing business.
Sales in the International business increased by L28 million, or 17%, to
L197 million in the six months ended June 30, 2000, from L169 million in the six
months ended June 30, 1999. This increase in sales was primarily due to an
increase in sales in our Latin American and Asian markets.
FT Knowledge increased sales by L3 million, or 38%, to L11 million in the
six months ended June 30, 2000, from L8 million in the six months ended
June 30, 1999. This increase in sales was primarily due to increases in both the
individual and corporate businesses.
FT GROUP
Sales in the FT Group increased by L78 million, or 24%, to L408 million in
the six months ended June 30, 2000, from L330 million in the six months ended
June 30, 1999. This increase in sales was primarily due to increases in
advertising at the FINANCIAL TIMES and LES ECHOS newspapers, increases at FT
Interactive Data due to the acquisition of the Thompson Financial Securities
business in July 1999 and the acquisition of a controlling interest in Data
Broadcasting
35
<PAGE>
Corporation in February 2000 and increases in internet enterprises. Operating
profit before internet enterprises, goodwill amortization and other items,
increased by L23 million, or 27%, to L109 million in the six months ended
June 30, 2000, from L86 million in the six months ended June 30, 1999.
Operating profit before internet enterprises, goodwill amortization and
other items at the FINANCIAL TIMES newspaper increased by L16 million, or 47%,
to L50 million in the six months ended June 30, 2000, from L34 million in the
six months ended June 30, 1999. This increase in operating profit was primarily
due to increases in advertising.
Operating profit before internet enterprises, goodwill amortization and
other items at FT Interactive Data increased by L11 million, or 73%, to
L26 million in the six months ended June 30, 2000, from L15 million in the six
months ended June 30, 1999. This increase in operating profit was primarily due
to the acquisition of the Thompson Financial Securities business in July 1999
and the acquisition of a controlling interest in Data Broadcasting Corporation
in February 2000.
Operating profit before internet enterprises, goodwill amortization and
other items at the Les Echos Group increased by L3 million, or 23%, to
L16 million in the six months ended June 30, 2000, from L13 million in the six
months ended June 30, 1999. This increase in operating profit was primarily due
to increases in circulation and advertising.
Operating profit before internet enterprises, goodwill amortization and
other items at Recoletos increased by L1 million, or 6%, to L19 million in the
six months ended June 30, 2000, from L18 million in the six months ended
June 30, 1999.
Operating profit from joint ventures and associates within the FT Group
decreased by L13 million to a loss of L5 million in the six months ended
June 30, 2000, from a profit of L8 million in the six months ended June 30,
1999. This decrease in operating profit was primarily due to the start-up costs
of FINANCIAL TIMES DEUTSCHLAND.
THE PENGUIN GROUP
Sales at the Penguin Group increased by L63 million, or 24%, to
L326 million in the six months ended June 30, 2000, from L263 million in the six
months ended June 30, 1999. This increase in sales was partly attributable to
the acquisition of DK in May 2000 which contributed sales of L32 million in the
six months ended June 30, 2000 and partly attributable to a number of new and
established authors reaching the best-seller lists in both the UK and the US.
Operating profit before internet enterprises, goodwill amortization and other
items increased by L2 million, or 6%, to L33 million in the six months ended
June 30, 2000, from L31 million in the six months ended June 30, 1999. This
increase in operating profit was primarily attributable to a number of new and
established authors reaching the best-seller lists in both the UK and the US and
was partly offset by the acquisition of DK in May 2000, which contributed a loss
of L4 million in the six months ended June 30, 2000.
PEARSON TELEVISION
Sales at Pearson Television increased by L5 million, or 3%, to L164 million
in the six months ended June 30, 2000, from L159 million in the six months ended
June 30, 1999. Operating profit before internet enterprises, goodwill
amortization and other items decreased by L1 million, or 3%, to L32 million in
the six months ended June 30, 2000, from L33 million in the six months ended
June 30, 1999.
On July 25, 2000, we merged Pearson Television into the RTL Group. We will
account for our interest in the RTL Group as an associate, rather than a
subsidiary. As a result, only our share of its profit before interest, interest
and taxation will be reflected in our financial results. For more information on
this merger, please refer to "Business--Operating Divisions--Pearson
Television".
36
<PAGE>
INTERNET ENTERPRISES
Sales in our internet enterprises increased by L14 million to L16 million in
the six months ended June 30, 2000, from L2 million in the six months ended
June 30, 1999. These sales all related to the FT Group. Operating losses
increased by L77 million to L84 million in the six months ended June 30, 2000,
from L7 million in the six months ended June 30, 1999. Of this loss,
L64 million was incurred by the internet enterprises of the FT Group,
L19 million was incurred by the internet enterprises of Pearson Education and
L1 million was incurred by the internet enterprises of Pearson Television. We
expect Pearson Education's internet enterprises to account for a higher
percentage of these operating losses in the future as we increase our investment
in the internet enterprises of Pearson Education. We expect our internet
enterprises to incur significant operating losses in the forseeable future as we
continue to invest in them. While we cannot predict the magnitude of these
operating losses with any specificity, our continued investment in our internet
enterprises will result in a decrease in our consolidated operating profit.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
CONSOLIDATED
SALES. Our total sales increased by L937 million, or 39%, to
L3,332 million in 1999, from L2,395 million in 1998. Sales from continuing
operations increased by L1,081 million, or 48%, to L3,332 million in 1999, from
L2,251 million in 1998. We realized this increase almost entirely in Pearson
Education, where sales increased by L1,023 million primarily due to the Simon &
Schuster acquisition in November 1998. This acquisition resulted in a full year
of the businesses acquired from Simon & Schuster being included in our 1999
figures as opposed to just over one month in 1998.
Pearson Education continued to be our largest business sector in 1999. Sales
at Pearson Education accounted for 52% of our total sales from continuing
operations in 1999, compared to 31% in 1998. North America continued to be the
most significant source of our sales, accounting for 60% of sales from
continuing operations in 1999, compared to 48% in 1998.
OPERATING PROFIT. Our total operating profit increased by L68 million, or
27%, to L318 million in 1999, from L250 million in 1998. However, our operating
profit before internet enterprises, goodwill amortization and other items
increased by L199 million, or 51%, to L588 million in 1999, from L389 million in
1998. The increase in operating profit was primarily due to increased profit
realized at Pearson Education, the FT Group and the Penguin Group.
- Operating profit before internet enterprises, goodwill amortization and
other items attributable to Pearson Education increased by L158 million,
or 160%, to L257 million in 1999, from L99 million in 1998, primarily due
to the Simon & Schuster acquisition in November 1998.
- Operating profit before internet enterprises, goodwill amortization and
other items attributable to the FT Group increased by L32 million, or 27%,
to L150 million in 1999, from L118 million in 1998, primarily due to
increases in circulation and advertising at the FINANCIAL TIMES and LES
ECHOS newspapers and increases in subscriptions and volume-related
business at FT Interactive Data.
- Operating profit before internet enterprises, goodwill amortization and
other items attributable to the Penguin Group increased by L17 million, or
35%, to L65 million in 1999, from L48 million in 1998, primarily due to a
number of new and established authors reaching the best-seller lists.
Our trading margin, which measures the ratio of trading profit, excluding
income from investments and associates and losses from internet enterprises, to
sales, increased to 15% in 1999, from 13% in 1998, primarily due to our effort
to decrease overall costs as a percentage of sales.
37
<PAGE>
EXCHANGE RATE FLUCTUATIONS. The weakening of sterling against the US dollar
on an average basis had a positive impact on reported sales and profits in 1999
compared to 1998. We estimate that if the 1998 average rates had prevailed in
1999, sales would have been lower by L33 million and operating profit would have
been lower by L5 million.
COST OF SALES AND NET OPERATING EXPENSES
The following table summarizes our cost of sales and net operating expense.
<TABLE>
<CAPTION>
1999 1998
-------------- -------------------------------
TOTAL CONTINUING TOTAL
-------------- -------------- --------------
LM LM LM
<S> <C> <C> <C>
COST OF SALES............................................... (1,424) (1,138) (1,176)
Distribution costs.......................................... (289) (168) (169)
Administration and other expenses........................... (1,470) (848) (933)
Other operating income...................................... 98 79 82
-------------- -------------- --------------
NET OPERATING EXPENSES...................................... (1,661) (937) (1,020)
============== ============== ==============
Analyzed as:
Net operating expenses--before exceptional items and
goodwill amortization..................................... (1,446) (854) (937)
Net operating expenses--exceptional items................... (85) (71) (71)
Net operating expenses--goodwill amortization............... (130) (12) (12)
-------------- -------------- --------------
NET OPERATING EXPENSES...................................... (1,661) (937) (1,020)
============== ============== ==============
</TABLE>
COST OF SALES. Our cost of sales from continuing operations increased by
L286 million, or 25%, to L1,424 million in 1999, from L1,138 million in 1998,
primarily due to the acquisition of Simon & Schuster. Cost of sales from
continuing operations decreased to 43% of sales in 1999 from 51% in 1998,
primarily due to the cost allocation mix at the businesses acquired from
Simon & Schuster, where cost of sales as a percentage of sales was lower than in
our other businesses. The allocation of expenses by function between cost of
sales, distribution and administration and other may vary between companies
depending on the type of business they operate in. Cost of sales as a percentage
of sales was lower at the education businesses acquired from Simon & Schuster,
and correspondingly distribution costs and administration and other costs as a
percentage of sales were higher, than our business information, consumer
publishing and television businesses. Additionally, exceptional costs associated
with the Simon & Schuster acquisition of L10 million in 1999 and L49 million in
1998 were recorded in cost of sales. Taking these exceptional costs into
consideration, cost of sales from continuing operations as a percentage of sales
was 42% in 1999 and 48% in 1998.
DISTRIBUTION COSTS. Our distribution costs from continuing operations
increased by L121 million, or 72%, to L289 million in 1999, from L168 million in
1998. Distribution costs increased to 9% of sales in 1999, from 8% of sales in
1998, primarily due to the cost allocation mix at the businesses acquired from
Simon & Schuster, where distribution costs as a percentage of sales were higher
than in our other businesses. Distribution costs primarily include shipping
costs, postage and packing.
ADMINISTRATION AND OTHER EXPENSES. Our administration and other expenses
from continuing operations increased by L622 million, or 73%, to L1,470 million
in 1999, from L848 million in 1998. Administration and other expenses increased
to 44% of sales in 1999, from 38% of sales in 1998, primarily due to the cost
allocation mix at the businesses acquired from Simon & Schuster, where
administration and other expenses as a percentage of sales were higher than in
our other
38
<PAGE>
businesses. In 1999, administration and other expenses included an exceptional
charge of L85 million due to the costs of the integration of the businesses
acquired from Simon & Schuster and goodwill amortization of L130 million,
L116 million of which related to the Simon & Schuster acquisition. In 1998,
administration and other expenses included an exceptional charge of L71 million
in respect of the integration of the businesses acquired from Simon & Schuster
and goodwill amortization of L12 million, L10 million of which related to the
Simon & Schuster acquisition. Excluding the exceptional charges and goodwill
amortization in 1999 and 1998, administration and other expenses would have been
38% of sales in 1999 compared to 34% in 1998, primarily due to the Simon &
Schuster acquisition, where administration and other expenses as a percentage of
sales were higher in 1999, primarily due to the cost allocation mix at the
businesses acquired from Simon & Schuster, where administration and other
expenses as a percentage of sales were higher than in our other businesses.
OTHER OPERATING INCOME. Other operating income from continuing operations
increased to L98 million in 1999 from L79 million in 1998 due to increased
rights and royalty income at Pearson Education as a result of the Simon &
Schuster acquisition, which was partly offset by reduced investment income.
GOODWILL AMORTIZATION AND OTHER ITEMS. Goodwill amortization increased by
L119 million to L131 million in 1999, from L12 million in 1998, primarily due to
the Simon & Schuster acquisition in November 1998. This acquisition resulted in
a full year of goodwill amortization being included in our 1999 figures as
opposed to just over one month in 1998. Goodwill is amortized over its estimated
useful life, not exceeding 20 years, and as such this charge is expected to
continue for the foreseeable futue. Other items decreased by L27 million, or
21%, to L100 million in 1999, from L127 million in 1998. Other items comprises a
charge in respect of the integration of the businesses acquired from Simon &
Schuster which decreased by L25 million, or 21%, to L95 million in 1999, from
L120 million in 1998 and a charge in respect of Year 2000 compliance costs which
decreased by L2 million, or 29%, to L5 million in 1999, from L7 million in 1998.
NON-OPERATING ITEMS. Profit before taxation on the sale of fixed assets,
investments, businesses and associates was L308 million in 1999 compared to
L407 million in 1998. Taxation on these items was L88 million in 1999 and
L103 million in 1998. In 1999, the most significant items were a profit of
L348 million on the sale of our interest in BSB Holdings Ltd. and a loss of
L19 million on the sale of our Extel research products business. In 1998, the
most significant items were a profit of L133 million on the sale of our 6.3%
shareholding in Societe Europeene des Satellites, a profit of L61 million on the
sale of our Law & Tax publishing business, and a profit of L157 million on the
sale of The Tussauds Group, our visitor attractions business.
INTEREST. Our total net interest payable increased by L108 million, or
277%, to L147 million in 1999, from L39 million in 1998, primarily due to a
L1,726 million increase in average net debt. The increase in net debt in 1999
reflected the impact for a full year, as opposed to just over one month in 1998,
of the borrowings incurred to finance the Simon & Schuster acquisition. The
subsequent enlargement of Pearson Education following the Simon & Schuster
acquisition also increased the debt needed to fund our working capital
requirements in the middle part of the year. However, this increase in debt was
partially offset by the proceeds received from asset disposals, also in the
middle part of the year. Our net interest rate payable averaged approximately
6.4% in 1999. This interest rate was lower than in 1998, when it was 6.8%,
mainly due to a change in the ratio of cash to gross debt, even though market
interest rates increased during the year. For a more detailed discussion of our
interest expenses see "--Quantitative and Qualitative Disclosures about Market
Risk". The effect of interest rate increases on us was also mitigated by our
existing portfolio of interest rate swaps, which converted over half of our
variable rate commercial paper and bank debt to a fixed rate basis.
39
<PAGE>
TAXATION. The taxation charge was L180 million in 1999, compared to
L188 million in 1998. The taxation charge was 37.5% of profit before taxation in
1999, compared to 29.9% in 1998. The main reason for the increase in the
effective rate is the significant increase in the charge for goodwill
amortization, which increased to L131 million in 1999, from L12 million in 1998,
reflecting the fact that the businesses acquired from Simon & Schuster were
included in our financial results for a full year in 1999. No taxation relief is
available on this amortization and, as in 1998, only limited taxation relief has
been recognized on the Simon & Schuster integration costs. In addition, the
overall taxation rate on the sale of fixed assets, investments, businesses and
associates increased to 28.6% in 1999, from 25.3% in 1998. The most significant
item was a profit of L348 million on the sale of our interest in BSB
Holdings Ltd., which yielded a benefit from the indexed taxation base cost being
higher than the book value. However, this benefit was offset by some smaller
disposals where the opposite was the case.
The taxation rate on adjusted earnings, as defined below, fell to 25% in
1999 from 28% in 1998. The difference of 5.25% between the UK statutory taxation
rate in 1999, which was 30.25%, and the effective taxation rate on adjusted
earnings in 1999, which was 25%, is primarily due to the availability of tax
losses in the US. The difference of 3% between the 31% UK statutory taxation
rate in 1998 and the effective taxation rate on adjusted earnings in 1998, which
was 28%, is lower than in 1999 due to increased profits in the US, in 1999,
which were relieved by tax losses. The benefit of the US losses in 1999 was
slightly offset by higher taxation rates in countries other than the UK and the
US and by the effect of disallowed expenses.
PROFIT. Profit for the financial year decreased by L143 million, or 33%, to
L294 million in 1999, from L437 million in 1998, primarily due to the decrease
in profits on the sale of fixed assets, investments, businesses and associates.
EARNINGS PER ORDINARY SHARE. Earnings per ordinary share, which reflect
earnings divided by the weighted average number of shares in issue, decreased to
48.2 pence in 1999 from 74.1 pence in 1998 based on a weighted average number of
shares of 610.2 million in 1999 and 589.8 million in 1998. This decrease was
primarily due to the decrease in profits on the sale of fixed assets,
investments, businesses and associates. Adjusted earnings per ordinary share
increased to 48.5 pence in 1999 from 42.0 pence in 1998. Adjusted earnings
exclude the profits or losses on the sale of fixed assets and investments,
businesses and associates, Year 2000 compliance costs, integration costs in
respect of the Simon & Schuster acquisition and goodwill amortization. Adjusted
earnings before internet enterprises per ordinary share increased to 53.3 pence
in 1999 from 42.0 pence in 1998. Adjusted earnings before internet enterprises
excludes the above-mentioned items and also excludes the losses arising on
internet enterprises. Diluted earnings per ordinary share decreased to 47.5
pence in 1999 from 73.3 pence in 1998 primarily due to the decrease in profits
on the sale of fixed assets, investments, businesses and associates. Earnings
dilution included the tax benefit on the conversion of certain share options by
employees and, after taking into account the effect of dilutive share options,
the weighted average number of ordinary shares applicable was 617.2 million in
1999 and 594.9 million in 1998.
40
<PAGE>
OPERATING PROFIT BY DIVISION
The following table summarizes our operating profit by division:
<TABLE>
<CAPTION>
OPERATING PROFIT BEFORE INTERNET OPERATING PROFIT AFTER INTERNET
ENTERPRISES, GOODWILL AMORTIZATION ENTERPRISES, GOODWILL AMORTIZATION
AND OTHER ITEMS AND OTHER ITEMS
--------------------------------------------- ---------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
--------------------- --------------------- --------------------- ---------------------
LM % LM % LM % LM %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pearson Education........ 257 48 99 30 36 13 (34) (18)
FT Group................. 150 28 118 36 103 38 114 61
The Penguin Group........ 65 12 48 15 64 24 46 24
Pearson Television....... 68 12 61 19 67 25 61 33
---- ---- ---- ---- ---- ---- ---- ----
Continuing Operations.... 540 100 326 100 270 100 187 100
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
PEARSON EDUCATION
Pearson Education's sales increased by L1,023 million, or 146%, to
L1,725 million in 1999 from L702 million in 1998, principally due to the
Simon & Schuster acquisition in November 1998, resulting in a full year of its
operations being included in 1999 as opposed to just one month in 1998. Pearson
Education's 1999 sales comprised 52% of our total sales.
Pearson Education realizes approximately two-thirds of its sales and all of
its profits in the second half of the year when it makes the majority of its
sales.
Operating profit before internet enterprises, goodwill amortization and
other items increased by L158 million, or 160%, to L257 million in 1999, from
L99 million in 1998. This increase in operating profit was primarily due to the
Simon & Schuster acquisition in November 1998.
Pearson Education was formed in November 1998 through the combination of the
businesses acquired from Simon & Schuster and Addison Wesley Longman, our
existing education business. As the two businesses have been integrated, it is
not possible to separate out the impact of the businesses acquired from Simon &
Schuster during 1999. As such, unaudited pro forma sales numbers for the
combined business have been compiled for 1998 by Pearson management to assist in
a meaningful comparison of the results of operations at Pearson Education.
The US Schools business increased sales by L49 million, or 9%, to
L586 million in 1999, from pro forma sales of L537 million in 1998. This
increase in sales was primarily due to a gain in market share by the math and
social studies programs during 1999.
The US Higher Education and Professional Publishing business increased sales
by L73 million, or 12%, to L666 million in 1999, from pro forma sales of
L593 million in 1998. This increase in sales was primarily due to increases in
the college publishing operations and the professional and technology publishing
group as demand increased in the technology and e-commerce areas.
Sales in the International business increased by L23 million, or 5%, to
L446 million in 1999, from pro forma sales of L423 million in 1998. This
increase in sales was primarily due to the strengthening of the international
distribution and marketing networks and the expansion of the English language
teaching business.
FT Knowledge, a newly formed management education business, had 1999 sales
of L19 million.
41
<PAGE>
FT GROUP
Sales in the FT Group increased by L4 million, or 1%, to L687 million in
1999, from L683 million in 1998. Operating profit before internet enterprises,
goodwill amortization and other items increased by L32 million, or 27%, to
L150 million in 1999, from L118 million in 1998, primarily due to increased
operating profit at the FINANCIAL TIMES, FT Interactive Data and Les Echos
Group.
Operating profit before internet enterprises, goodwill amortization and
other items at the FINANCIAL TIMES newspaper increased by L14 million, or 33%,
to L56 million in 1999, from L42 million in 1998. This increase in operating
profit was partly attributable to an increase in circulation levels. The average
daily circulation in December 1999 was 14% higher than the equivalent period in
1998. This increase was also partly attributable to advertising revenues, which
increased by 19% in 1999.
Operating profit before internet enterprises, goodwill amortization and
other items at FT Interactive Data, excluding the operating profits of the
businesses sold during 1999, increased by L9 million, or 41%, to L31 million in
1999, from L22 million in 1998. This increase in operating profit was primarily
due to growth in the level of subscriptions and volume-related business.
Operating profit before internet enterprises, goodwill amortization and
other items at Les Echos Group, excluding the operating profits of its medical
division which was sold during 1999, increased by L8 million, or 80%, to
L18 million in 1999, from L10 million in 1998. This increase in operating profit
was partly attributable to a 7% increase in circulation at the newspaper, and
partly attributable to a 41% increase in advertising revenues at the newspaper
in 1999.
Operating profit at Recoletos increased by L4 million, or 13%, to
L34 million in 1999, from L30 million in 1998. This increase in operating profit
was primarily due to a 20% increase in advertising revenues at MARCA in 1999.
Operating profit from associates within the FT Group decreased by
L3 million, or 20%, to L12 million in 1999, from L15 million in 1998. This
decrease in operating profit was primarily due to the start-up costs of
FINANCIAL TIMES DEUTSCHLAND.
THE PENGUIN GROUP
Sales at the Penguin Group increased by L42 million, or 8%, to L565 million
in 1999, from L523 million in 1998. Operating profit before internet
enterprises, goodwill amortization and other items increased by L17 million, or
35%, to L65 million in 1999, from L48 million in 1998. This increase in
operating profit was primarily due to a number of new and established authors
reaching the best-seller lists in both the UK and the US.
As a percentage of sales, operating profit before internet enterprises,
goodwill amortization and other items increased to 11.5% in 1999, from 9.2% in
1998, due to cost savings from the steps taken in 1998 to rationalize the US
warehousing and distribution systems and the integration of the UK children's
division.
42
<PAGE>
PEARSON TELEVISION
Sales at Pearson Television increased by L12 million, or 3%, to
L355 million in 1999, from L343 million in 1998. Operating profit before
internet enterprises, goodwill amortization and other items increased by
L7 million, or 11%, to L68 million in 1999, from L61 million in 1998.
On July 25, 2000, we merged Pearson Television into the RTL Group. We will
account for our interest in the combined entity as an associate, rather than a
subsidiary as is presently the case, and hence only our share of profit before
interest, interest and taxation of the combined entity will be consolidated. For
more information on this merger, please refer to "Business--Operating
Divisions--Pearson Television".
INTERNET ENTERPRISES
Sales in our internet enterprises, principally those of the FT Group, were
L7 million in 1999. Operating losses were L39 million, of which L36 million was
incurred by the internet enterprises of the FT Group and L3 million was incurred
by the internet enterprises of Pearson Education. We expect Pearson Education's
internet enterprises to account for a higher percentage of these operating
losses in the future as we increase our investment in the internet enterprises
of Pearson Education. Internet enterprises were not significant prior to 1999
and, as a result, comparisons to the results of prior periods are not
meaningful. We expect our internet enterprises to incur significant operating
losses in the foreseeable future as we continue to invest in them. While we
cannot predict the magnitude of these operating losses with any specificity, our
continued investment in our internet enterprises will result in a reduction in
our consolidated operating profit.
DISCONTINUED OPERATIONS
In March 2000, we completed the sale of our interests in the Lazard Houses
group of investment banks to Financiere et Industrielle Gaz et Eaux S.A. for
L410 million. In addition to this stated purchase price, we received a
L26 million dividend. If there is an initial public offering or sale of the
Lazard Houses at any time prior to September 30, 2001, we will receive 50% of
any net gains realized by Gaz et Eaux within two years of that event. The Lazard
Houses provide corporate finance advice and, to a lesser extent, participate in
fee-earning business activities, such as fund management and securities trading.
In 1999, our interests in the Lazard Houses produced an operating profit of
L48 million.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED
SALES. Total sales increased by L102 million, or 4%, to L2,395 million in
1998, from L2,293 million in 1997. Sales from continuing operations increased by
L240 million, or 12%, to L2,251 million in 1998, from L2,011 million in 1997.
This increase in sales from continuing operations was primarily due to increased
sales at Pearson Education and Pearson Television. Sales at Pearson Education
increased by L139 million, or 25%, to L702 million in 1998, from L563 million in
1997, primarily due to the Simon & Schuster acquisition in November 1998, which
contributed L120 million to total sales in 1998. Sales at Pearson Television
increased by L96 million, or 39%, to L343 million in 1998, from L247 million in
1997, due primarily to the acquisition of All American Communications in
November 1997, which contributed approximately L120 million to total sales in
1998. Sales from discontinued operations amounted to L144 million in 1998 and
L282 million in 1997.
Pearson Education was the largest business sector by sales in 1998. Sales at
Pearson Education accounted for 31% of sales from continuing operations in 1998,
compared to 28% in
43
<PAGE>
1997. North America was the most significant geographic source of sales,
accounting for 48% of sales from continuing operations in 1998, compared to 46%
in 1997.
OPERATING PROFIT. Total operating profit decreased by L78 million, or 24%,
to L250 million in 1998, from L328 million in 1997. However, operating profit
before goodwill amortization and other items increased by L61 million, or 19%,
to L389 million in 1998, from L328 million in 1997. This increase was largely
due to increased profit at Pearson Education and Pearson Television.
- Operating profit before goodwill amortization and other items attributable
to Pearson Education increased by L39 million, or 65%, due mainly to the
November 1998 Simon & Schuster acquisition, which contributed operating
profit before goodwill amortization and other items of L22 million in
1998.
- Operating profit before goodwill amortization and other items attributable
to Pearson Television increased by L35 million, or 135%, to L61 million in
1998, from L26 million in 1997, primarily due to the acquisition of All
American Communications in November 1997, which contributed operating
profit of L21 million in 1998.
EXCHANGE RATE FLUCTUATIONS. The strengthening of sterling against the US
dollar on an average basis had a detrimental impact on reported sales and
profits in 1998 compared to 1997. We estimate that if the 1997 average rates had
prevailed in 1998, then sales would have been higher by L45 million and
operating profit higher by L6 million.
COST OF SALES AND NET OPERATING EXPENSES
The following table summarizes our cost of sales and net operating expenses.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
CONTINUING TOTAL CONTINUING TOTAL
-------------- -------------- -------------- --------------
LM LM LM LM
<S> <C> <C> <C> <C>
COST OF SALES................................... (1,138) (1,176) (1,003) (1,114)
Distribution costs.............................. (168) (169) (123) (126)
Administration and other expenses............... (848) (933) (701) (844)
Other operating income.......................... 79 82 68 72
-------------- -------------- -------------- --------------
NET OPERATING EXPENSES.......................... (937) (1,020) (756) (898)
============== ============== ============== ==============
Analyzed as:
Net operating expenses--before exceptional items
and goodwill amortization..................... (854) (937) (726) (864)
Net operating expenses--exceptional items....... (71) (71) (30) (34)
Net operating expenses--goodwill amortization... (12) (12) -- --
-------------- -------------- -------------- --------------
NET OPERATING EXPENSES.......................... (937) (1,020) (756) (898)
============== ============== ============== ==============
</TABLE>
COST OF SALES. Cost of sales from continuing operations increased by
L135 million, or 13%, to L1,138 million in 1998 from L1,003 million in 1997,
primarily due to the acquisition of Simon & Schuster.
DISTRIBUTION COSTS. Distribution costs from continuing operations,
primarily shipping costs, postage and packing, increased by L45 million, or 37%,
to L168 million in 1998, from L123 million in 1997. Distribution costs as a
percentage of sales increased to 7.5%, from 6.1%, primarily due to the Simon &
Schuster acquisition.
44
<PAGE>
ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses from
continuing operations increased by L147 million, or 21%, to L848 million in
1998, from L701 million in 1997. As a percentage of sales, administration and
other expenses increased to 37.7% in 1998, from 34.9% in 1997. In 1998,
administration and other expenses included an exceptional charge of L71 million
in respect of the integration of the businesses acquired from Simon & Schuster
and goodwill amortization of L12 million, L10 million of which related to the
Simon & Schuster acquisition. In 1997, administration and other expenses
included an exceptional charge of L30 million attributed to restructuring
charges of L14 million at FT Group, L12 million at Pearson Education and
L4 million at Pearson Television. Excluding exceptional charges and goodwill
amortization, administration and other expenses for 1998 were 34.0% of sales
from continuing operations compared to 33.4% in 1997.
OTHER OPERATING INCOME. Other operating income from continuing operations
increased by L11 million, or 16%, to L79 million in 1998, from L68 million in
1997, due to increases in each of the four operating divisions.
CHANGE IN ACCOUNTING STANDARD. In 1998, we implemented UK Accounting
Standard FRS10 "Goodwill and Intangible Assets" with effect from January 1,
1998. This Standard required that purchased goodwill be shown as an asset on the
balance sheet and amortized over its useful economic life, presumed to be not
greater than 20 years, unless shown otherwise. The amortization charge is taken
through the profit and loss account and is shown as a deduction from operating
profit. Our goodwill amortization has been excluded from adjusted earnings to
show results on a comparable basis. Goodwill amortization in 1998 was L12
million, primarily due to the Simon & Schuster acquisition in November 1998.
OTHER ITEMS. Other items were L127 million in 1998. There were no other
items in 1997. Other items comprises a charge of L120 million in respect of the
integration of the businesses acquired from Simon & Schuster and a charge of L7
million in respect of Year 2000 compliance costs.
NON-OPERATING ITEMS. Profit before taxation on the sale of fixed assets,
investments, businesses and associates amounted to L407 million in 1998,
compared with a loss before taxation of L156 million in 1997. Taxation on these
items was L103 million in 1998 and L5 million in 1997. In 1998, the most
significant items were a profit of L133 million on the sale of our 6.3%
shareholding in Societe Europeene des Satellites, a profit of L61 million on the
sale of our Law & Tax publishing business, and a profit of L157 million on the
sale of The Tussauds Group, our visitor attractions business. The primary source
of the loss recorded in 1997 was the write-down of L212 million against the
goodwill acquired in the acquisition of Mindscape Inc. in 1995. The write-down
was taken to reflect its realizable value.
INTEREST. Total net interest payable fell to L39 million in 1998, from
L42 million in 1997. This decrease was primarily due to the decrease in net debt
over the first ten months of 1998 from L707 million to net cash of L418 million
at the end of October 1998 and the decrease in floating interest rates in
sterling from 7.6% to 6.4% and in US dollars from 5.7% to 5.2% during the last
four months of 1998. However, for the year as a whole, floating interest rates
were slightly higher in 1998 than in 1997 in sterling and virtually unchanged in
US dollars. The acquisition of Simon & Schuster at the end of November increased
net debt by L2,868 million to L2,279 million at December 31, 1998 and added
approximately L12 million to the 1998 interest charge.
TAXATION. The taxation charge was L188 million in 1998, compared to
L89 million in 1997, primarily due to tax on the sale of fixed assets,
investments, businesses and associates which amounted to L103 million in 1998
and L5 million in 1997. Taxation was 29.9% of profit before taxation in 1998,
compared to 68.9% in 1997. Although only limited taxation relief has been
recognized on the integration costs of the Simon & Schuster acquisition in 1998,
the effect of this
45
<PAGE>
limitation was largely offset by the fact that, as in 1997, the tax rate on
profits on the disposal of businesses and investments was partially offset by
losses brought forward. The 1997 rate was abnormally high as there was no
current taxation relief for the charge of L212 million in respect of the
write-down of Mindscape Inc. goodwill described above. Excluding this amount,
the effective rate in 1997 would have been 26% of profit before taxation.
The taxation rate on adjusted earnings fell to 28% in 1998, from 29.4% in
1997. As in 1997, the availability of taxation losses in the US meant that no
significant taxation was assessed on our profits arising there. This factor
alone accounted for 2.7% of the difference between the UK statutory rate of 31%
and the effective rate of 28% in 1998 on adjusted earnings. The 1998 taxation
rate on adjusted earnings also benefited from the release of some provisions for
earlier year's taxation following settlement of the liability for those years,
and this factor effectively offset the effect of disallowed expenses and our
exposure to higher taxation rates in countries other than the UK and US.
PROFIT. Profit for the financial year increased to L437 million in 1998,
from L38 million in 1997, primarily due to the increase in profits on the sale
of fixed assets, investments, businesses and associates.
EARNINGS PER ORDINARY SHARE. Earnings per ordinary share, which reflect
earnings divided by the weighted average number of shares in issue, increased to
74.1 pence in 1998, from 6.6 pence in 1997, based on a weighted average number
of shares of 589.8 million in 1998 and 572.8 million in 1997. This increase was
primarily due to the increase in profits on the sale of fixed assets,
investments, businesses and associates. Adjusted earnings per ordinary share
increased to 42.0 pence in 1998 from 34.9 pence in 1997. Adjusted earnings
exclude profits or losses on the sale of fixed assets and investments,
businesses and associates, Year 2000 compliance costs, integration costs related
to the Simon & Schuster acquisition and goodwill amortization. Diluted earnings
per ordinary share increased to 73.3 pence in 1998, from 6.4 pence in 1997,
primarily due to the increase in profits on the sale of fixed assets,
investments, businesses and associates. Earnings dilution included the tax
benefit on the conversion of some share options by employees and, after taking
into account the effect of dilutive share options, the diluted weighted average
number of ordinary shares was 594.9 million in 1998 and 577.5 million in 1997.
OPERATING PROFIT BY DIVISION
The following table summarizes our operating profit by division.
<TABLE>
<CAPTION>
OPERATING PROFIT BEFORE OPERATING PROFIT AFTER
GOODWILL AMORTIZATION GOODWILL AMORTIZATION
AND OTHER ITEMS AND OTHER ITEMS
----------------------------------------- -----------------------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
----------------------------------------- -----------------------------------------
1998 1997 1998 1997
------------------- ------------------- ------------------- -------------------
LM % LM % LM % LM %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pearson Education.................... 99 30 60 24 (34) (18) 60 24
FT Group............................. 118 36 108 43 114 61 108 43
The Penguin Group.................... 48 15 58 23 46 24 58 23
Pearson Television................... 61 19 26 10 61 33 26 10
---- ---- ---- ---- ---- ---- ---- ----
Continuing Operations................ 326 100 252 100 187 100 252 100
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
46
<PAGE>
PEARSON EDUCATION
Pearson Education's sales increased by L139 million, or 25%, to
L702 million in 1998, from L563 million in 1997. This increase was primarily due
to the Simon & Schuster acquisition in November 1998, which contributed sales of
L120 million in 1998. Excluding the impact of the Simon & Schuster acquisition,
1998 sales increased by L19 million, or 3%, compared to 1997.
Operating profit before goodwill amortization and other items increased by
L39 million, or 65%, to L99 million in 1998 from L60 million in 1997, with the
businesses acquired from Simon & Schuster contributing L22 million of the
increase. Excluding the impact of the Simon & Schuster acquisition, 1998
operating profit increased by L17 million, or 28%, compared to 1997,
attributable to a worldwide restructuring program and cost control measures.
Operating profit in 1997 was reduced by restructuring costs of L12 million due
to our new management team's initiative to restructure the worldwide financial,
managerial and sales organization.
Sales at the US Schools division increased by L32 million, or 17%, to
L218 million in 1998, from L186 million in 1997, primarily as a result of the
adoption by many southern states of Addison Wesley Longman's new math program.
1998 was the first year of major new math adoptions from kindergarten up to
eighth grade in a number of the southern states of the US. In addition, the US
Schools business gained market shares in new biology and foreign language
programs.
Sales in the US Higher Education and Professional Publishing division
remained the same at L153 million in both 1998 and 1997.
Sales in the International division declined by L4 million, or 2%, to
L209 million in 1998, from L213 million in 1997. The most significant cause of
the decline in sales was the impact of general economic uncertainties in Asia
and Latin America, which particularly affected the English language training
business in Asia.
FT GROUP
Sales in the FT Group increased by L7 million, or 1%, to L683 million in
1998, from L676 million in 1997. Operating profit before internet enterprises
and other items increased by L10 million, or 9%, to L118 million in 1998, from
L108 million in 1997, primarily due to increased operating profit at the
FINANCIAL TIMES newspaper.
Operating profit before goodwill amortization and other items at the
FINANCIAL TIMES newspaper increased by L7 million, or 20%, to L42 million in
1998, from L35 million in 1997, partly due to an increase in circulation levels.
The average daily circulation in December 1998 was 12.6% higher than in December
1997. The increase in operating profit was also partly attributable to a 17%
increase in advertising revenues in 1998. In 1998, the strategy of investing in
new print sites continued with sites opening in Milan and Chicago. This
investment strategy, which started in 1996, is designed to increase circulation
and advertising revenues in markets outside the United Kingdom through timely
delivery of editions tailored to the particular geographic region or country.
Operating profit before goodwill amortization and other items at FT
Interactive Data and FT Business remained at L19 million for both 1997 and 1998.
However, during 1998 we sold a number of businesses, including the Law & Tax
publishing business and the Register group. Excluding the operating losses of
the businesses which were sold, operating profit increased by L5 million, or
26%, to L24 million in 1998, from L19 million in 1997.
Operating profit before goodwill amortization and other items at Les Echos
Group increased by L3 million, or 33%, to L12 million in 1998, from L9 million
in 1997, primarily due an increase in sales at the newspaper. In 1998, average
annual circulation increased by 4% and advertising revenues increased by 20%.
47
<PAGE>
Operating profit at Recoletos, however, was L30 million for both years due
to significant investments made in 1998 in new products and services and in
improving the sports newspaper, MARCA. MARCA'S annual average circulation fell
by 9% in 1998, due to increasing competition from other daily sports newspapers.
EXPANSION, the financial and business publication, increased its average daily
circulation by 22%. EXPANSION'S advertising revenues increased by 25% in 1998.
Operating profit before goodwill amortization and other items from
associates within the FT Group remained at L15 million in both 1997 and 1998
with The Economist Group contributing almost all of the reported operating
profit.
THE PENGUIN GROUP
Sales at the Penguin Group declined by L2 million, or 0.4%, to L523 million
in 1998, from L525 million in 1997. Operating profit before goodwill
amortization and other items decreased by L10 million, or 17.2%, to L48 million
in 1998, from L58 million in 1997. Operating profit was reduced in 1998 by
restructuring costs incurred as a result of the integration of Ladybird Books
into the children's book group and the loss of income from Troll, the children's
book publisher, which was sold in mid-1997.
Excluding the above factors and portfolio and exchange rate changes,
operating profit before goodwill amortization and other items increased by
L3 million, or 6%, to L52 million in 1998, from L49 million in 1997, primarily
due to increased frontlist trading in Penguin UK's general division. The growth
was also attributable to increased trading in the children's book group, due in
part to increased UK government funding for children's publishing.
PEARSON TELEVISION
Sales at Pearson Television increased by L96 million, or 39%, to
L343 million in 1998, from L247 million in 1997, principally due to the
acquisition of All American Communications at the end of 1997. Operating profit
before goodwill amortization and other items, excluding Pearson's share of
Channel 5 losses and excluding income from its investment in BSB Holdings Ltd.,
increased by L25 million, or 54%, to L71 million in 1998, from L46 million in
1997, principally due to the acquisition of All American Communications at the
end of 1997.
DISCONTINUED OPERATIONS
In 1998, we sold our consumer software business, Mindscape Inc., for
L91 million, giving rise to a loss of L11 million. In 1997, Mindscape Inc.
contributed sales of L84 million and profits of L2 million. Also in 1998, we
sold our visitor attractions business, The Tussauds Group, for L352 million,
giving rise to a profit of L157 million, and our consumer magazines business,
Pearson New Entertainment, for L125 million, giving rise to a profit of
L41 million. In 1997, The Tussauds Group contributed sales of L107 million and
profits of L22 million, and Pearson New Entertainment contributed sales of
L91 million and profits of L6 million. We treated the sales and operating
profits of these businesses as "discontinued" in our consolidated financial
statements in 1998. The profit or loss on the sale of these businesses was
treated as an exceptional item and has been included in consolidated profit
before interest, but excluded from consolidated operating profit.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND FINANCING DURING THE SIX MONTHS ENDED JUNE 30, 2000
Net cash outflow from operating activities was L200 million in the six
months ended June 30, 2000, compared to L52 million in the six months ended
June 30, 1999. The main reason for this increase in cash outflow was an increase
in the cash required for operations due to a L137 million
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increase in inventory levels, including L132 million at Pearson Education where
we have taken advantage of early order programs offered at major US printers. We
generally made capital expenditures to replace or upgrade existing equipment,
but our 2000 capital expenditures also included the costs associated with a
warehousing integration program at Pearson Education. Capital expenditures
increased by L24 million, or 59%, to L65 million in the six months ended
June 30, 2000, compared to L41 million in the six months ended June 30, 1999.
Depreciation increased by L3 million, or 7%, to L44 million in the six months
ended June 30, 2000, compared to L41 million in the six months ended June 30,
1999. Net cash used in our internet enterprises was L88 million in the six
months ended June 30, 2000, compared to L4 million in the six months ended
June 30, 1999, and was used for marketing, editorial, technical and other
operating expenses.
The sale of investments provided cash inflow of L3 million in the six months
ended June 30, 2000, compared to L108 million in the six months ended June 30,
1999 which included L80 million from the sale of several of the businesses
acquired from Simon & Schuster.
The acquisition of businesses accounted for a cash outflow of L482 million
in the six months ended June 30, 2000, compared to L17 million in the six months
ended June 30, 1999. The principal acquisition was the purchase of DK for L310
million. The sale of associates contributed a cash inflow of L394 million in the
six months ended June 30, 2000, compared to L12 million in the six months ended
June 30, 1999. The primary source of cash inflow from the sale of associates in
the six months ended June 30, 2000, was the L392 million net proceeds from the
disposal of the Lazard Houses.
Interest paid increased to L105 million in the six months ended June 30,
2000, compared to L98 million in the six months ended June 30, 1999.
CASH FLOWS AND FINANCING DURING 1999
Net cash inflow from operating activities increased 8% to L433 million in
1999, from L402 million in 1998. The main reason for this increase was an
increase in operating profit of L187 million, before goodwill amortization,
which was partly offset by an increase in cash required for operations due to
increased inventory levels. Inventory levels increased in 1999 in anticipation
of increased sales levels, primarily at Pearson Education. We generally made
capital expenditures to replace or upgrade existing equipment, but our 1999
capital expenditures also included the acquisition of a new printing press at
Recoletos and the costs associated with warehousing integration programs at
Pearson Education and the Penguin Group. Capital expenditures decreased by
L23 million, or 18%, to L102 million in 1999, from L125 million in 1998.
Depreciation increased by L16 million, or 24%, to L82 million in 1999, from
L66 million in 1998. Net cash used in our internet enterprises was L32 million
in 1999 and was used for marketing, editorial, technical and other operating
expenses. We expect this to increase in future periods as we continue to invest
in our internet enterprises.
The sale of investments provided cash inflow of L624 million in 1999,
compared to L199 million in 1998. Of this cash inflow, we received L438 million
from the sale of our interest in BSB Holdings Ltd. and L184 million from the
sale of several of the businesses acquired from Simon & Schuster.
The acquisition of businesses accounted for a cash outflow of L249 million
in 1999, compared to L2,936 million in 1998. The principal acquisitions in 1999
were the purchase of Thomson Financial Securities Management for L93 million and
the purchase of 23.2% of Recoletos for L136 million, and the principal
acquisition in 1998 was the Simon & Schuster acquisition. The sale of businesses
contributed a cash inflow of L44 million in 1999, compared to L718 million in
1998. The primary sources of cash inflow from the sale of businesses in 1999
were disposal of our Extel research products business for L18 million and the
disposal of the medical division of Les Echos
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<PAGE>
Group for L19 million. The primary sources of cash from the sale of businesses
in 1998 were the L91 million disposal of Mindscape Inc., the L125 million
disposal of Pearson New Entertainment and the L352 million disposal of The
Tussauds Group.
Interest paid increased to L182 million in 1999, from L88 million in 1998,
primarily due to the higher level of debt during 1999.
CASH FLOWS AND FINANCING DURING 1998
Net cash inflow from operating activities increased 97% to L402 million in
1998, from L204 million in 1997. This increase resulted primarily due to
decreased inventory of L39 million, decreased operating receivables of
L77 million and increased operating payables of L117 million. Capital
expenditures increased by L15 million, or 14%, to L125 million in 1998, from
L110 million in 1997. Depreciation increased by L1 million, or 1.5%, to
L66 million in 1998, from L65 million in 1997. Capital expenditures were, in
general, related to replacements and upgrades to existing equipment, the
acquisition of a new printing press at Recoletos and costs associated with a
warehousing integration program at the Penguin Group.
The sale of investments in 1998 provided an increase of L51 million, or 34%,
to cash inflow to L199 million in 1998, from L148 million in 1997. Of this cash
inflow, we received L160 million from the sale of our 6.3% shareholding in
Societe Europeenne des Satellites and L28 million from the sale of our 2.7%
shareholding in Flextech plc in 1998. In 1997, we received L111 million from the
sale of our 10% shareholding in Television Broadcasts Limited.
The acquisition of businesses accounted for a cash outflow of
L2,936 million in 1998 and L269 million in 1997. Our principal acquisition in
1998 was Simon & Schuster's education, business and professional and reference
publishing divisions for L2,868 million. In 1997, our principal acquisition was
All American Communications for L247 million. The sale of businesses contributed
a cash inflow of L718 million in 1998 and L54 million in 1997. The primary
sources of cash from the sale of businesses in 1998 were the disposal of
Mindscape Inc. for L91 million, Pearson New Entertainment for L125 million and
The Tussauds Group for L352 million. In 1997, cash inflow from the sale of
businesses resulted from the disposal of Churchill Communications for
L57 million.
NCS ACQUISITION
We have agreed to purchase all of the outstanding capital stock of NCS for
approximately $2.5 billion. We intend to finance this acquisition with the
proceeds of the rights offering. However, our acquisition of NCS is not
conditioned upon the full subscription of the rights offering. To the extent the
rights offering is not fully subscribed, we may be required to borrow under our
credit facility a portion of the funds required to complete the acquisition.
CAPITAL RESOURCES
We believe our working capital is sufficient to meet our current
requirements. At June 30, 2000, our net debt was L2,544 million compared to net
debt of L2,540 million at June 30, 1999. Net debt is defined as all short-term,
medium-term and long-term borrowing, less all cash and liquid resources. Liquid
resources comprise short-term deposits of less than one year and investments
that are readily realizable and held on a short-term basis. Short-term,
medium-term and long-term borrowing amounted to L2,913 million at June 30, 2000,
compared to L2,891 million at June 30, 1999. At June 30, 2000, cash and liquid
resources were L369 million, compared to L351 million at June 30, 1999.
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BORROWINGS
Our borrowings fluctuate by season due to the effect of the school year on
the working capital requirements of the educational book business. Assuming no
acquisitions or disposals, our maximum level of net debt normally occurs in
July, and our minimum level of net debt normally occurs in December.
In July 2000, we negotiated a $2.5 billion credit facility with a group of
international banks. The credit facility refinanced all existing committed bank
debt. The credit facility is a term revolving credit facility which matures in
July 2005. As of the date of this prospectus approximately $670 million is
available under this facility. The credit facility contains two key covenants
measured for each 12 month period ending June 30 and December 31:
- We must maintain the ratio of our profit before interest and tax to our
interest payable at no less than 3:1; and
- We must maintain the ratio of our net debt to our EBITDA at no more than
4:1.
The covenants provide for the exclusion from the ratio calculations of specified
amounts of internet-related expenditures. We are currently in compliance with
these covenants.
TREASURY POLICY
We hold financial instruments for two principal purposes: to finance our
operations and to manage the interest rate and currency risks arising from our
operations and from our sources of financing.
We finance our operations by a mixture of cash flows from operations, short
term borrowings from banks and commercial paper markets, and longer term loans
from banks and capital markets. We borrow principally in US dollars, sterling
and euro at both floating and fixed rates of interest, using derivatives where
appropriate to generate the desired effective currency profile and interest rate
basis. The derivatives used for this purpose are principally interest rate
swaps, interest rate caps and collars, currency swaps and forward foreign
exchange contracts. For a more detailed discussion of our borrowing and use of
derivatives, see "--Quantitative and Qualitative Disclosures about Market Risk".
EUROPEAN MONETARY UNION
Our businesses in continental Europe have found that the euro has simplified
trading, while presenting little or no operational or competitive difficulty.
All UK operations have contingency plans in the event that the UK decides to
join the euro-zone. The financial costs of preparations for the euro have not
been material to us.
ACCOUNTING PRINCIPLES
The following summarizes the principal differences between UK GAAP and US
GAAP in respect of our financial statements. See Note 34 to our consolidated
financial statements appearing elsewhere in this prospectus.
Prior to January 1, 1998, under UK GAAP, goodwill was written off to the
profit and loss reserve in the year of acquisition. Under US GAAP, as well as UK
GAAP from January 1, 1998, goodwill is recognized as an asset, and amortization
expense is recorded over useful lives ranging between 5 and 20 years. Intangible
assets under UK GAAP are recognized only when they may be disposed of without
also disposing of the business to which they relate, and for that reason it is
rare that intangible assets are separately identified and recorded apart from
goodwill. Under US GAAP, there is no similar requirement with respect to
intangible assets, and they should be recognized
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<PAGE>
separately from goodwill when they are separately identifiable and measurable.
Under US GAAP, intangible assets such as publishing rights, television
production and distribution rights, non-compete agreements, software, databases
and advertising relationships have been recognized and are being amortized over
a range of useful lives between two and 16 years. The difference in goodwill and
intangible assets also creates a difference in the gain or loss recognized on
the disposal of a business due to amortization expense taken with respect to the
goodwill and intangible assets, as UK GAAP requires that goodwill be removed
from the profit and loss reserve upon disposal and factored into the gain or
loss on disposal calculation.
Under UK GAAP, the liability method is used in recording deferred taxation,
and consideration is given to whether or not the liability will be realized
within the foreseeable future. This can result in the full potential liability
not being recognized. Deferred tax assets are rarely recognized under UK GAAP.
Under US GAAP, the full provision method is used, meaning that all deferred tax
assets and liabilities are recorded. An assessment is then made with respect to
whether the deferred tax assets are realizable, and a determination is made as
to whether a valuation allowance is necessary with respect to the deferred tax
assets. The principal differences we recognize relate to deferred tax assets in
the United States.
Acquisition adjustments have arisen with respect to the Pearson Education
acquisition of Simon & Schuster during 1998. Under US GAAP, the criteria
necessary for recognizing some restructuring costs in acquisition accounting for
the Simon & Schuster acquisition have been met, and a provision for these costs
has been included in the purchase price allocation. Under UK GAAP, these types
of restructuring costs are recorded as period costs when incurred and may not be
included in the allocation of the purchase price.
Under UK GAAP, there are no specific criteria which must be fulfilled in
order to record derivative contracts such as interest rate swaps, currency swaps
and forward currency contracts as a hedging instrument. Accordingly, based upon
our intention and stated policy with respect to entering into derivative
transactions, they have been recorded as hedging instruments for UK GAAP. This
means that unrealized gains and losses on these instruments are typically
deferred and recognized when realized. Under US GAAP, our derivative contracts
do not meet the prescriptive criteria for hedge accounting, and are recorded at
market value at each period end, with changes in their fair value being recorded
currently in the profit and loss account.
Under UK GAAP, the cost of providing pension benefits is expensed over the
average expected useful service lives of eligible employees, using long-term
actuarial assumptions. Under US GAAP, the annual pension costs comprise the
estimated cost of benefits accruing in the period, and actuarial assumptions are
adjusted annually to reflect current market and economic conditions.
Additionally, under US GAAP, part of the surplus, which is the excess of plan
assets over plan liabilities, is recognized on the balance sheet. The remainder
of the unrecognized surplus is spread over the employees' remaining service
lifetimes.
Under UK GAAP, no compensation costs associated with non-qualified stock
option plans are recognized if the value of the option at the date of grant is
equal to or greater than the market value on that date. Under US GAAP, we have
adopted the fair value method of accounting for options. Compensation expense is
determined based upon the fair value at the grant date, and has been estimated
using the Black Scholes model. Compensation cost is recognized over the service
life of the awards, which is normally equal to the vesting period. Compensation
expense is also recognized under US GAAP with respect to UK qualified
non-compensatory plans, such as the Save as You Earn option plan and the
Worldwide Save for Shares plan, as these plans offer employees a discount of
greater than 15% from market value.
For a further explanation of the differences between UK GAAP and US GAAP,
see Note 34 to the consolidated financial statements.
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YEAR 2000
We did not experience any significant Year 2000 related disruptions. We
successfully implemented a comprehensive Year 2000 compliance program that
included assessment, testing, remediation, and contingency planning in the areas
of critical business computer systems and critical plant floor equipment.
We estimate that our total Year 2000 compliance costs were approximately
L19 million, which represents the cost of remedial work required to make all of
our systems Year 2000 compliant. It does not include the cost of upgrades or
hardware replacement, which has been capitalized.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
Our principal market risks are changes in interest rates and currency
exchange rates. Following evaluation of these positions, we selectively enter
into derivative financial instruments to manage our risk exposure. For this
purpose, we primarily use interest rate swaps, interest rate caps and collars,
forward rate agreements, currency swaps and forward foreign exchange contracts.
Managing market risks are the responsibility of the group financial director who
acts pursuant to policies approved by our board of directors. A treasury
committee of the board receives regular reports on our treasury activities,
which our outside advisers also review periodically.
We have a policy of not undertaking any speculative transactions, and we
hold the derivative and other financial instruments for purposes other than
trading.
We have formulated our policies for hedging exposures to interest rate and
foreign exchange risk, and have used derivatives without regard to existing or
future US GAAP requirements on hedge accounting. We are satisfied that the
present policies achieve our objectives, and that the near equivalence between
the carrying book value and fair value of our financial liabilities and
derivative contracts confirms this. However, our existing derivative contracts
do not qualify for hedge accounting under US GAAP.
The following discussion and tables address market risk only and do not
present other risks that we face in the normal course of business, including
country risk, credit risk and legal risk.
INTEREST RATES
Our financial exposures to interest rates arise primarily from our
borrowings, particularly those in US dollars. We manage our exposure by
borrowing at fixed and variable rates of interest, and by entering into
derivative instruments. Objectives approved by our board concerning the
proportion of outstanding fixed rate debt govern our use of these financial
instruments.
Our objectives are applied to core net debt, which is year-end borrowings
net of year-end cash and liquid funds. Those objectives are that for between 50%
and 65% of current core debt, the rate of interest should be fixed or capped for
the next two years, and that for between 40% and 60%, the rate of interest
should be fixed or capped from two years to a date five years from the present.
Within these target ranges the proportion that is hedged is triggered by a
formula based on historical interest rate frequencies.
In 1998, however, our objective was to hedge at least one-third of our core
sterling and US dollar net borrowings for five years. We changed our policy in
recognition of increased interest rate risk due to the greater level of core net
debt following the acquisition of the Simon & Schuster educational business in
November 1998.
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The principal method to hedge interest rate risk is to enter into an
agreement to pay a fixed-rate and receive a variable rate, known as a swap.
Under interest rate swaps, we agree with other parties to exchange, at specified
intervals, the difference between fixed-rate and variable-rate amounts
calculated by reference to an agreed notional principal amount. The majority of
these contracts are US dollar denominated, and some of them have deferred start
dates, in order to maintain the desired risk profile as other contracts mature.
The variable rates received are normally based on three-month LIBOR, and the
dates on which these rates are set do not exactly match those of the hedged
borrowings. We believe that our portfolio of these types of swaps is an
efficient hedge of our portfolio of variable rate borrowings.
In addition, from time to time we issue bonds or other capital market
instruments to refinance existing bank debt. To avoid the rate unduly
influencing the interest expense on a single transaction, it is our normal
practice to enter into a related derivative contract effectively converting the
interest rate profile of the bond transaction to that of the debt which it is
refinancing. Most often this is a variable interest rate denominated in US
dollars. In several cases, the bond issue was denominated in a different
currency than the debt being refinanced and we have entered into a related
interest rate and currency swap in order to maintain an unchanged borrowing risk
profile.
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The table below lists for each of the years 2000 to 2004 the notional
amounts and weighted average interest rates, as of December 31, 1999, for both
our borrowings and our currency and interest rate swaps.
<TABLE>
<CAPTION>
MATURITIES
-----------------------------------------------------------------------------------------------------------
FAIR FAIR
THERE TOTAL VALUE TOTAL VALUE
2000 2001 2002 2003 2004 AFTER 1999 1999 1998 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LM LM LM LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BORROWINGS AND OTHER
FINANCIAL LIABILITIES
Fixed rate
US $................ - - - - - 153 153 155 148 160
Average rate........ 7.38% 7.38% 7.38%
Sterling............ - - 100 - 125 346 571 616 325 388
Average rate........ 10.75% 9.50% 8.01% 8.82% 10.19%
Euro................ - - - - 341 - 341 324 - -
Average rate........ 4.63% 4.63%
---- ---- ----- ----- ------ ------ ------ ------ ------ ------
Variable rate
US $................ 61 155 155 817 - - 1,188 1,188 1,718 1,718
Average rate........ 6.55% 7.18% 7.38% 7.45% 7.36% 5.76%
Sterling............ - - - 80 - - 80 80 292 292
Average rate........ 7.41% 7.41% 5.90%
Euro................ - - - - - - - - 159 159
Average rate........ 4.09%
Other............... 1 - - - - - 1 1 11 11
==== ==== ===== ===== ====== ====== ====== ====== ====== ======
INTEREST RATE AND
CURRENCY SWAPS(3)(4)
Pay US $ variable/.... - - 102 - 120 153 375 (13) 117 (33)
Receive Sterling
fixed................ (100) (125) (150) (375) (125)
US $ variable
rate(2)........... 6.86% 7.96% 7.33% 7.41% 6.31%
GBP fixed rate.... 7.00% 10.41% 7.00% 8.13% 10.41%
Pay US $ variable/.... - - - - 97 - 97 8 - -
Receive Euros fixed... (93) (93)
US $ variable
rate(2)........... 7.62% 7.62%
EUR fixed rate.... 4.63% 4.63%
==== ==== ===== ===== ====== ====== ====== ====== ====== ======
INTEREST RATE SWAPS(3)
US $
Variable to
fixed(1)............. 50 90 - 422 252 310 1,124 (32) 1,090 38
Average pay rate...... 5.64% 6.15% - 6.02% 5.98% 6.36% 6.11% 6.11% -
Average receive
rate(2).............. 6.40% 6.75% - 6.92% 6.96% 7.10% 6.94% 5.32% -
Fixed to variable..... - - - - - 155 155 (2) 151 (18)
Average pay rate(2)... - - - - - 7.04% 7.04% 5.37%
Average receive
rate................. - - - - - 7.23% 7.23% 7.23%
Sterling
Variable to fixed..... 40 30 - - - - 70 - 40 1
Average pay rate...... 7.16% 4.98% - - - - 6.22% 7.16%
Average receive
rate(2).............. 6.68% 6.68% - - - - 6.68% 5.45%
Fixed to
variable(1).......... - - 100 100 - 20 220 - 120 (6)
Average pay rate(2)... - - 6.88% 6.45% - 6.61% 6.66% 5.40%
Average receive
rate................. - - 6.60% 7.00% - 7.46% 6.86% 6.74%
Euros
Fixed to variable..... - - - - 248 - 248 11 - -
Average pay rate(2)... - - - - 5.75% - 5.75% -
Average receive
rate................. - - - - 4.63% - 4.63% -
==== ==== ===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
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------------------------------
(1) The nominal value of US $ "variable to fixed" interest rate swaps includes
L118 million (L491 million in 1998) of deferred start contracts that do not
provide fixed rate cover on the balance sheet date. In addition, L100
million of sterling "fixed to variable" interest rate swaps maturing in 2003
are forward starting once the equivalent nominal value in 2002 matures.
(2) All variable rate legs of the interest rate swaps pay or receive every three
months on a margin above or below three-month LIBOR. Three-month LIBOR rates
at December 31, 1999 for the US dollar, euro and sterling were 6.00%, 3.34%
and 6.08%, respectively. The average interest rate payable on net debt at
December 31, 1999 was 6.3% and averaged 6.4% during the whole year.
(3) The "variable to fixed" interest rate swaps are used wholly for the hedging
of our portfolio of variable rate borrowings. The "fixed to variable"
interest rate swaps are used wholly for the conversion of capital market
transactions to a floating rate basis.
(4) The currency swap converts sterling and euro to US dollars at an average of
$1.61 and $1.04, respectively.
Our interest-bearing financial assets of L328 million, consisting of
floating rate cash and deposits, earn interest based on relevant national
equivalents to the London Interbank Depository Rate. In 1998, we held
L345 million of interest-bearing financial assets. The fair value approximates
to the carrying value due to their short maturity periods of less than three
months.
CURRENCY EXCHANGE RATES
Although we are based in the UK, we have significant investments in overseas
operations. The most significant currency for us is the US dollar, followed by
the euro and sterling.
Our policy is to manage the currency composition of our core borrowings in
US dollars, euros and sterling in order to approximate the percentages of those
currencies as reflected in our forecast operating profit. We use external
borrowings and currency swaps to manage this exposure. This policy aims to
dampen the impact of changes in foreign exchange rates on consolidated interest
cover and earnings. While long-term core borrowing is now limited to US dollars,
euros and sterling, we still borrow small amounts in other currencies, typically
for seasonal working capital needs.
At December 31, 1999, the percentages of aggregate net borrowings in our
three core currencies were: US dollar 80%, or L1,641 million, euro 9%, or
L188 million, and sterling 11%, or L224 million. Taking into account the Lazard
Houses disposal and a [EURO]650 million bond issue in February 2000, on a pro
forma basis the respective percentages were: US dollar 76%, euro 15% and
sterling 9%. This corresponds to the 1999 forecast of operating profit by
currency of US dollar 76%, euro 16% and sterling 8%.
We are also exposed to currency exchange rates in our cash transactions and
our investments in overseas transactions. Cash transactions--typically for
purchases, sales, interest or dividends--require cash conversions between
currencies. Fluctuations in currency exchange rates affect the cash amounts that
we pay or receive.
Investments in overseas operations are consolidated for accounting purposes
by translating values in one currency to another currency, in particular from US
dollars to sterling. Fluctuations in currency exchange rates affect the currency
values recorded in our accounts, particularly those in sterling, although they
do not give rise to any realized gain or loss, nor to any currency cash flows.
FORWARD FOREIGN EXCHANGE CONTRACTS
We use forward foreign exchange contracts where a specific major project or
forecasted cash flow, including acquisitions and disposals, arises from a
business decision that has used a specific foreign exchange rate. Our policy is
to effect transactional conversions between currencies, for example, to collect
receivables or settle payables at the relevant spot exchange rate.
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Our forward exchange contracts that relate to cash flow conversion are
summarized by currency below for 1999. We had no forward foreign exchange
contracts in 1998. The receive euros/pay sterling contracts have a weighted
average maturity of nine months. These contracts match exactly the forecast cash
flows for start-up costs on FINANCIAL TIMES DEUTSCHLAND. All other contracts
have a maturity of less than one month.
FOREIGN EXCHANGE CONTRACTS FOR CASH FLOW CONVERSION
<TABLE>
<CAPTION>
CONTRACT
AMOUNT GAIN/(LOSS)
------------ ------------
LM LM
<S> <C> <C>
Receive euros / Pay sterling(1)(4).......................... L10
Average contractual exchange rate........................... L0.65 L(0.3)
Receive US dollars / Pay sterling(2)(3)(4).................. L279 L1
Average contractual exchange rate........................... $ 1.62
</TABLE>
------------------------------
(1) The receive euros/pay sterling contracts have a weighted average maturity of
nine months. These contracts match exactly the forecast cash flows for
start-up costs on FINANCIAL TIMES DEUTSCHLAND.
(2) All other contracts have a maturity of less than one month.
(3) The L279 million of receive US dollars/pay sterling contracts relates to the
announced disposal of Lazard banking houses that closed on March 3, 2000 for
L410 million. In addition to the purchase price, we received a L26 million
dividend.
(4) There were no material outstanding contracts of this nature in 1998.
We seek to offset purchases and sales in the same currency, even if they do
not occur simultaneously. In addition, our debt and cash portfolios management
gives rise to temporary currency shortfalls and surpluses. Both of these
activities require us to use short-dated swaps between currencies. The table
below summarizes our 1999 position by currency pair. We had no outstanding
contracts of that type in 1998.
FOREIGN EXCHANGE CONTRACTS DUE TO TIMING DIFFERENCES
<TABLE>
<CAPTION>
CONTRACT
AMOUNT GAIN/(LOSS)
--------- ------------
LM LM
<S> <C> <C>
Receive US dollars / Pay euros(1)(2)........................ L47 -
Average contractual exchange rate........................... 1.$01
</TABLE>
------------------------------
(1) These contracts, with a maturity of less than one month, transferred US
dollar cash balances into euros in order to partially fund the purchase of a
further 20% stake in Recoletos.
(2) There were no outstanding contracts of this nature in 1998.
Although we prepare our consolidated accounts in sterling, we have invested
significant sums in overseas assets, particularly in the US. Therefore,
fluctuations in currency exchange rates, particularly between the US dollar and
sterling, and also between the euro and sterling, are likely to affect
shareholders' funds and other accounting values.
The introduction of the euro on January 1, 1999 allowed greater revenue and
cost offsetting than previously available operating in separate currencies,
therefore reducing our market rate.
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BUSINESS
INTRODUCTION
Pearson is a global media company with its principal operations in the
education, business information, consumer publishing and television markets. We
have significant operations in the US and generate more than half our revenues
from that market. On July 31, 2000, we announced an agreement to acquire NCS for
a purchase price of approximately $2.5 billion. NCS is a leading testing and
educational services company in the US. The combination of NCS and Pearson
Education will create an integrated education company with strong market
positions in curricular content, online learning, assessment, enterprise
applications for US schools and professional accreditation.
We intend to finance the acquisition of NCS through the rights offering. We
believe the rights offering to be the most efficient means for us to raise the
necessary funds.
PEARSON PLC
We create and manage intellectual property, which we promote and sell to our
customers under well-known brand names, to inform, educate and entertain. We
deliver our content in a variety of forms and through a variety of channels,
including books, newspapers, television programs and internet services.
We use online capabilities in our back office, our supply chains, our base
businesses and new businesses we create. The internet is already both an
integral part of each of our businesses and a facilitator of new product and
distribution opportunities.
Although we seek to build businesses that are worth more together than apart
because of the synergies they offer each other, our operations break down into
four core areas:
- PEARSON EDUCATION is a leading international publisher of textbooks,
supplementary materials and electronic education programs for elementary
and secondary school, higher education and business and professional
markets. In the US, our Scott Foresman, Addison Wesley Longman, Prentice
Hall and Allyn & Bacon brands have enabled us to capture significant
shares in the kindergarten through 12th grade markets. Our higher
education business has been pre-eminent in the US for many years. Our
international education business is the global leader in the English
language teaching materials market and has a major position in the
textbook and educational materials market outside the US, including being
the largest textbook and school program provider in a number of local
markets. In addition, we are a leader in using technology to educate,
including online assessment and digital courseware through the Computer
Curriculum Corporation, as well as products such as the Waterford Early
Reading Program and the KnowZone. Our education offerings also extend to
business education, where FT Knowledge provides distance learning for the
corporate and post-secondary markets and has entered into several
agreements with major business schools and other educational institutions
in the US and worldwide. We are currently developing the Learning Network,
a vertically integrated, internet-delivered community linking parents,
teachers and students with educational opportunities. On June 29, 2000, we
announced the purchase of an 87% interest in FamilyEducation Network,
Inc., an online network for parents, teachers and students. We are working
to form strategic alliances with other internet content providers, to put
in place the necessary technological infrastructure and management team
for the Learning Network to develop a marketing program. We expect to
launch the Learning Network in the Fall of 2000.
NCS, which will become a part of Pearson Education upon completion of the
acquisition, is the United States' largest commercial processor of student
assessment tests for kindergarten through 12th grade. NCS offers a secure
internet-based electronic testing delivery and reporting capacity,
allowing it to participate in the professional certification market. It
also
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provides software, services, systems applications and internet-based
technologies for the collection, management and interpretation of data in
education. NCS seeks to use internet-based technologies to increase its
market penetration and offer additional innovative products and services
to its customers in the education field.
- THE FT GROUP consists of our international newspaper, print and online
financial information, business magazine and professional publishing
interests. Our flagship product is the FINANCIAL TIMES, known
internationally for its premium editorial content and international scope.
Building upon the success of the FINANCIAL TIMES, we have developed a
global information portal (FT.com), an online personal finance resource
(FTYourMoney.com), and a European online financial news website
(FTMarketWatch.com). We have also developed a pan-European network of
leading business newspapers and related online business portals, including
FINANCIAL TIMES DEUTSCHLAND, LES ECHOS and EXPANSION, for the German,
French and Spanish-speaking markets. We own Recoletos, a Spanish media
group which, in addition to EXPANSION, publishes MARCA, the leading
Spanish sports newspaper, and we hold a 50% stake in THE ECONOMIST, an
international weekly current affairs and business magazine. We also own
60% of Data Broadcasting Corporation, a supplier of electronic database
services to US and UK securities professionals. Data Broadcasting
Corporation has a 34% ownership interest in MarketWatch.com, whose web
properties, CBS.MarketWatch.com and bigcharts.com, are among the most
popular destinations for financial and market news on the web.
- THE PENGUIN GROUP is one of the premier English language publishers in the
world, with brand imprints such as Penguin, Avery, Dutton, Putnam and
Viking. We publish an extensive portfolio of fiction and non-fiction,
literary and commercial works from authors such as Tom Clancy, Clive
Cussler, Dick Francis, Patricia Cornwell and Nick Hornby. We are one of
the pre-eminent classics publishers and own or have rights to some of the
most highly prized and enduring brands in children's publishing, featuring
the books of Roald Dahl and such popular characters as Spot, Peter Rabbit
and Madeline. We have a strong frontlist of new books by bestselling
authors, and a backlist of more than 25,000 popular titles. In 1999,
titles published by Penguin Putnam, as we are known in the US, spent a
record 262 weeks on THE NEW YORK TIMES bestseller list. Our recent
acquisition of Dorling Kindersley, or DK, a leading international
publisher of illustrated reference books, will add breadth to our
portfolio. DK offers many products with illustrations and graphics that
are particularly well-suited for online delivery, and DK has invested in
converting its properties into a digital format. As a result, this
acquisition also gives us many more opportunities for online rights
exploitation.
- PEARSON TELEVISION was recently merged with CLT-Ufa, the television and
broadcasting business owned by Germany's Bertelsmann AG, and Belgium's
Audiofina, to create the RTL Group. The combined company is an integrated
pan-European company with activities in television production, online
delivery and broadcasting, including the well-known RTL television
stations. The RTL Group is Europe's largest radio and television broadcast
company by revenue and its shares are traded on the London Stock Exchange.
The terms of the merger, which closed on July 25, 2000, provide us with a
22% interest in the RTL Group, and representation on its board.
COMPETITIVE STRENGTHS
We have achieved leading positions in our markets by capitalizing on our
competitive strengths:
- POWERFUL BRANDS--We have made a substantial investment to develop and
promote our quality brands. Our brands create customer loyalty and
facilitate the use of new distribution channels and our entry into new
markets.
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- RICH CONTENT--Each of our businesses creates and manages informative,
educational and entertaining content. The quality, depth and originality
of our products reinforce the strength of our brands and attract
customers, partners and talented employees.
- INTERNATIONAL SCALE--We have operations around the world and publications
in English, French, Spanish, German and many other languages. Our large
business presence in many local markets enables us to move rapidly to
capitalize on international opportunities.
- ATTRACTIVE CUSTOMER BASE--Our products appeal to a range of customers --
institutions, businesses and a broad group of consumers of all ages and
interests. We have a highly educated customer base with a substantial
discretionary spending capacity.
- PROVEN MANAGEMENT TEAM--Since 1997, a new management team has transformed
the company into a simpler, more integrated media enterprise focused on
our core businesses. Since we started this process, we have publicly set
clear financial goals and consistently met or exceeded them.
OUR STRATEGIES
We focus on media businesses in growing markets and categories where we have
or we can attain strong, sustainable market positions. We use our content and
brands in our existing businesses and to develop new ones. We have integrated
the internet into each of our businesses to enhance our customers' experiences,
improve our ability to reach customers and increase the value of our content.
- PEARSON EDUCATION constantly seeks ways to make products more attractive
to teachers, students, parents and professionals. Over 1,200 of our
approximately 49,000 college textbooks have interactive companion websites
with online study guides to elaborate on text concepts, and chat rooms and
bulletin boards to facilitate interaction between students and faculty. We
continue to invest in a range of electronic learning tools to support our
programs. We are also developing the Learning Network, an interactive
online community of parents, students and teachers, to further expand the
distribution of our content and generate new revenue streams. In addition,
we are seeking to expand our international reach to benefit from our
market expertise and build scale.
Our acquisition of NCS will transform Pearson Education into an integrated
education company.The combined business will be well-placed to create new
market opportunities through developing customized learning in which
testing and curriculum work together. The combined business will connect
schools and homes, enabling parents to play a more active role in the
education of their children.
- THE FT GROUP aims to be the leading source of strategic information,
intelligence, analysis and commentary for senior managers and
institutional and individual investors around the world. We are building
on the strength of our flagship brand, the FINANCIAL TIMES, to create a
pan-European network of national business newspapers and websites,
including LES ECHOS in France, EXPANSION in Spain and FINANCIAL TIMES
DEUTSCHLAND in Germany. With THE WALL STREET JOURNAL, we have also
launched VEDOMOSTI, a Russian language business newspaper.
We use the well recognized brand and premium content of the FINANCIAL
TIMES to develop new websites with diverse revenue models. We continue to
invest in FT.com, our leading global business information portal, to
further enhance its content, include more international company and market
information and add more sophisticated tools intended to increase the
"stickiness" of the site. We have launched FTYourMoney.com to capitalize
on the rapidly growing personal finance market in the UK and
FTMarketWatch.com to capture the expanding market of European investors
who make their investment decisions online or look to the internet for
quick, market-oriented news.
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- THE PENGUIN GROUP continues to strengthen its frontlist, working globally
to extend its stable of bestselling authors and identify new talent. We
are digitizing our business--all of our new titles and over half of our
backlist titles have been converted to an electronic digital format to
enable "printing on demand" and "e-book" delivery. We are also building
online communities around authors and genres to strengthen our
relationship with our readers and to create new revenue streams.
We recently acquired DK, a publisher of illustrated products such as travel
and children's reference books. We believe that DK's high quality
illustrated publications, many of which have been converted to a digital
format permitting online delivery, will provide us access to new customers
and markets, expand our product offerings and enhance our online marketing
efforts.
- PEARSON TELEVISION'S recently completed merger to form the RTL Group
offers Pearson Television the opportunity to take its quality content into
new distribution channels that are offered by our media partners. The RTL
Group will continue Pearson Television's development of online versions of
television shows, such as THE PRICE IS RIGHT, and the building of online
communities around popular serial dramas.
We are working to capture the full synergistic potential that exists among
our media businesses through the sharing of content and distribution channels.
For example, FT Knowledge, our online distance learning business, results from
the merger of Pearson Education's higher education textbooks and professional
publishing resources with the FT Group's distance learning and management
education resources. Longman Penguin Readers are simplified classics for new
English speakers, combining Pearson Education's English language training
resources and Penguin's classics library. Content from Penguin and the FT Group
will be featured on our Learning Network.
NCS ACQUISITION
NCS is a leading testing and educational services company in the US. For its
fiscal year ended January 29, 2000, NCS had revenues of $630 million, compared
to $505 million for the prior fiscal year, and income from operations of
$70 million, compared to $55 million for the prior fiscal year. At January 29,
2000, NCS had total assets of $450 million, total long-term debt of $2 million,
total cash and cash equivalents of $27 million and total stockholders' equity of
$276 million.
We have agreed to acquire all of the outstanding shares of NCS for
approximately $2.5 billion, or $73 per share. Our merger agreement requires us
to launch a cash tender offer for all of the issued and outstanding shares of
NCS's common stock on or before August 7, 2000. The tender offer will remain
open for 23 business days, unless extended in accordance with the merger
agreement, and will be conditioned on the tender of a sufficient number of
shares to give us ownership of at least a majority of the fully diluted
outstanding shares of NCS. After the completion of the tender offer, NCS will
merge with us, and the remaining shareholders of NCS other than us will receive
the same cash consideration per share as offered in the tender offer. We intend
to finance the NCS acquisition with the proceeds of the rights offering.
We believe the acquisition of NCS is an important step in the development of
Pearson Education, providing the following opportunities:
- INTEGRATING EDUCATIONAL PROGRAMS. The combination of curricular content,
testing, and educational applications creates opportunities to provide
schools, universities, colleges and professional and training
organizations a comprehensive range of education solutions, encompassing
curricular and training programs, assessment and testing and educational
services, including student curriculum, instructional and financial
management software.
- CUSTOMIZING LEARNING. Combining NCS's assessment tools with our curricular
content will enable us to create customized learning programs individually
tailored for each student.
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- EXTENDING CUSTOMER REACH. Our salesforce will market NCS's instruction
management software, assessment tools and school administrative software
to kindergarten through 12th grade school districts to supplement NCS's
own direct salesforce.
- ACCELERATING THE DEVELOPMENT OF NEW ONLINE PRODUCTS. NCS's online business
will complement our business enabling us to offer electronic end-to-end
learning solutions.
- DEVELOPING A NEW MARKET, WITH PARENTS AS CUSTOMERS. NCS's products will
enable us to reach parents with new educational content, creating new
revenue opportunities for our educational publishing business. It will
also extend the scale and reach of our Learning Network, enabling it to
reach directly a much bigger audience of parents and students.
- MOVING INTO NEW PROFESSIONAL MARKETS. Our professional publishing and
corporate training business will enable NCS to market its testing and
assessment skills to meet the growing demand for accreditation in a wide
range of professions and disciplines.
- WIDENING INTERNATIONAL SPREAD. With major educational publishing
operations around the world, Pearson Education will enhance NCS's
international presence.
OPERATING DIVISIONS
PEARSON EDUCATION
Pearson Education is one of the world's largest publishers of textbooks and
paper and online teaching materials based on published sales figures and
independent estimates of sales. Pearson Education serves the growing demands of
teachers, students, parents and professionals throughout the world for
stimulating effective education programs. In 1999, Pearson Education had sales
of L1,725 million, or 52% of Pearson's total sales.
An integral part of Pearson Education's strategy is the creation of
interactive education communities through the development of an online education
network. On June 29, 2000, we announced the purchase, for $129 million, of an
87% interest in FamilyEducation Network, Inc., or FEN, an online network for
parents, teachers and students. America Online, Inc. will continue to be a
minority shareholder in FEN, along with FEN's founders. In addition, we also
announced a three-year agreement with AOL under which our Learning Network will
be an anchor tenant on the main screen of AOL's Research and Learn Channel,
providing educational content for all stages of a person's life, from pre-school
to adult learning, including ongoing education and professional training. We
expect to launch the Learning Network in the Fall of 2000. We are currently
working to identify internet content providers with whom we may form alliances
in connection with the Learning Network. We are also working on the Learning
Network's technological infrastructure and on assembling its management team
within Pearson. The final step in connection with the Learning Network's launch
will be the development of a marketing program. We expect the Learning Network
will require significant further investment in the future before becoming
profitable.
Upon completion of the NCS acquisition, its operations will become part of
Pearson Education. NCS is the US's largest commercial processor of student
assessment tests for kindergarten through 12th grade. It is the largest single
provider of student curriculum, instructional and financial management software
to schools. NCS provides schools with suites of integrated software modules,
along with professional services designed to meet the reporting needs of
administrators and the curriculum needs of teachers. NCS also provides large
scale performance measurement projects, including program design, item
development, program management, software development, printing packaging,
distribution, collection, processing, scoring and reporting. Among its other
services, NCS provides large scale project management for student financial aid
applications and other post-secondary applications.
In a world shaped by an increasingly knowledge-based economy, there is a
large appetite for education in both the developed and developing worlds.
Governments, corporations and individuals
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see education as a necessary component for success and are willing to invest in
it. Favorable demographics, the spread of public education in the developing
world and increasing demand to learn English are all factors driving this
growth. The international market for educational programs includes not only
local language textbooks, but also English language teaching materials and
professional publications.
<TABLE>
<S> <C>
PEARSON EDUCATION'S WELL KNOWN BRANDS
PRENTICE HALL............................. a secondary school publisher of engineering, math,
science and humanities titles and a higher
education publisher in every discipline
SCOTT FORESMAN............................ a publisher of reading, math and science titles for
elementary school
ADDISON WESLEY LONGMAN.................... a higher education publisher of science, math and
business titles
ALLYN & BACON............................. a publisher of education, social science and
humanities titles for the higher education market
MACMILLAN USA AND PEARSON PROFESSIONAL
TECHNICAL REFERENCE..................... publishers of computer books
SILVER BURDETT GINN....................... a publisher of math and music titles for the
elementary school market
</TABLE>
The internet provides an ideal medium for our quality education programs,
which we create and sell for use with our textbooks and as stand-alone products.
Our internet initiatives also include the creation of the Learning Network, an
internet-delivered network of education services. Both our base products and the
development of the Learning Network have been facilitated by minority
investments in internet companies, including:
- Copernicus, which provides customized, local education portals, marketed
as EdGate, for teachers, parents and students,
- Blackboard, an internet infrastructure company whose learning software
backs up online teaching environments in over 1,800 American colleges and
universities, and
- Score! Learning, a local education service provider that provides online
coaching, testing and support and is developing, with Pearson, an internet
version.
Pearson Education has three principal divisions--US schools, higher
education and professional publishing and international. Each division
contributes approximately one-third of Pearson Education's revenues.
US SCHOOLS
Pearson Education is a leading US school publisher for kindergarten through
12th grade, with a comprehensive range of textbooks, supplementary materials and
electronic education programs. We believe that our market share in this segment
is approximately 25%. Pearson Education's premier elementary school imprint,
Scott Foresman, and premier secondary school imprint, Prentice Hall School,
publish high quality programs covering subjects such as reading, literature,
math, science and social studies. In addition, these groups publish online
assessment and digital courseware through the Computer Curriculum Corporation,
as well as programs such as the Waterford Early Reading Program and the
KnowZone. We also publish supplementary teaching aids for both elementary and
secondary schools and teacher-written activity books.
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With over 90% of education spending in this segment in the US financed at
the state or local level, the US Schools division's major customers are state
education boards and local school districts. In the US, 20 states, which account
for over 50% of the total kindergarten through 12th grade US school population
of some 52 million students, buy educational programs by means of periodic
statewide "adoptions". These adoptions cover programs in the core subject areas.
Typically, a state committee selects a short-list of education programs from
which the school districts then make individual choices. We actively seek to
keep as many of our offerings as possible on the approved list in each state and
we market directly to the school districts. In the 30 states without adoptions,
or "open territories", local school districts choose education programs from the
extensive range available. We actively market to school districts in open
territories as well. Our revenues are split evenly between adoption states and
open territory states.
HIGHER EDUCATION AND PROFESSIONAL PUBLISHING
Pearson Education is America's largest publisher of educational textbooks
and related materials for colleges and universities. We publish across all of
the main fields of study with imprints such as Prentice Hall, Addison Wesley
Longman and Allyn & Bacon. We market primarily to college professors who choose
the texts to be purchased by their students. Over 1,200 of Pearson Education's
approximately 49,000 college textbooks have an interactive companion website
with online study guides to reinforce text concepts, and chat rooms and bulletin
boards to facilitate interaction between students and faculty. An increasing
number of our programs are delivered through online course management systems
that provide a powerful set of easy-to-use tools that allow professors to create
sophisticated web-based courses.
We also publish textbooks and reference books for industry professionals,
with a particular strength in computers and information technology where we are
the world's largest publisher. Our imprints in this area include Macmillan USA,
Pearson Professional Technical Reference, Prentice Hall, Addison Wesley Longman
and Adobe Press. Many of these publications are also available both on the
internet and via CD-ROM. Online sales have grown rapidly. We work closely with
many independent online retailers and operate our own portal for IT
professionals, InformIT.
INTERNATIONAL
Pearson Education has sales, distribution and publishing operations in 35
countries throughout the world. We produce textbooks, English language teaching
materials (in which we are a global leader) and professional publications. Our
international division also represents translations and imprints of our US
higher education and professional publications.
Our publications are primarily in English and are marketed to the English
speaking markets. In addition to English, we also publish in the local language
in a number of countries, including Germany, France, Spain, Italy, Mexico,
Colombia, Brazil, Hong Kong, Japan and South Korea. In a number of English
speaking countries, we are the largest publisher of school materials.
FT KNOWLEDGE
At the end of 1998, we combined our distance learning management education
operations into one business, FT Knowledge. These operations include online MBA
and online business skills courses. FT Knowledge is a leading provider of
business education and management development programs. We specialize in
providing education that is highly relevant to the needs of businesses and their
employees. Linking up with some of the most respected academic institutions, we
operate around the world to create virtual universities and online business
schools for a variety of courses. On July 28, 2000 we acquired The Forum
Corporation, one of America's top corporate training companies, for
$90 million.
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THE FT GROUP
The FT Group is an integrated print and online operation comprising
newspapers, print and online financial information, business magazines and
professional publishing interests. The FT Group aims to be the leading source of
strategic information, intelligence, commentary and analysis for senior managers
and institutional and individual investors around the world. The FINANCIAL
TIMES, the group's flagship publication, is generally recognized as the world's
leading international business newspaper. In 1999, the FT Group had sales of
L687 million, or 21% of Pearson's total sales.
Business is now global, and the demand for strategic business
information--the combination of news, data, comment, analysis and context in
which the FT Group excels--is growing fast. In addition to professional and
business consumers, individuals around the world are demanding such strategic
business information. The FT Group is very well positioned to supply information
and benefit from these trends.
Since 1997, we have:
- Expanded the circulation and geographic reach of the FINANCIAL TIMES in
all forms through active promotion of its brand and rich content,
- Extended the FT brand to the internet through FT.com, a global business
information portal,
- Invested in more editorial talent, and created an integrated newsroom
serving both the newspaper and FT.com, and
- Continued to develop a pan-European network of national business
newspapers and related online services.
<TABLE>
<S> <C>
PRIMARILY PRINT SERVICES
FINANCIAL TIMES........................ Regarded as the leading international business
newspaper (FT.com)
LES ECHOS GROUP........................ Publishes France's leading business and financial
newspaper and leading business website (lesechos.fr)
RECOLETOS.............................. Publishes EXPANSION, Spain's leading business and
financial newspaper and MARCA, the leading Spanish
sports newspaper; has a 30% interest in EL MUNDO, a
leading daily newspaper, and operates one of Spain's
leading business and financial websites
(expansiondirecto.com)
FINANCIAL TIMES DEUTSCHLAND............ A new German language business newspaper with an
integrated online business news and data service
(ftd.de) (50% interest)
BDFM................................... Publishes South Africa's leading daily and weekly
financial newspapers and website (bdfm.co.za) (50%
interest)
THE ECONOMIST GROUP.................... Publishes one of the world's leading weekly business
and current affairs magazines (economist.com) (50%
interest)
FINANCIAL TIMES BUSINESS............... Publishes INVESTORS CHRONICLE, THE BANKER, MONEY
MANAGEMENT and FINANCIAL ADVISOR
</TABLE>
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<TABLE>
<S> <C>
PRIMARILY ONLINE SERVICES
FT.COM................................. One of the leading portals on the web for global
business information (FT.com)
FTYOURMONEY.COM........................ A leading source for independent personal finance
information in the UK (FTYourMoney.com)
FT INTERACTIVE DATA.................... One of the world's leading sources of securities
pricing and specialist financial information
(intdata.com and dbc.com) (60% interest)
ESIGNAL................................ An online real-time streaming quotation service for
brokers and active traders (esignal.com) (60%
interest)
MARKETWATCH.COM........................ Popular destination on the web for financial and
market news (CBS.MarketWatch.com and bigcharts.com)
(34% interest)
FTMARKETWATCH.COM...................... Real-time financial and market news for the European
market (FTMarketWatch.com) (under development)
FT ENERGY.............................. An online and print service providing expert
analysis, database information systems and consulting
services for the energy industry
OTHER
FINANCIAL TIMES CONFERENCES............ Organizes high-level strategic events for the
international business community
FTSE INTERNATIONAL..................... A joint venture with the London Stock Exchange
providing the investment community with the top UK
indices and, together with the Amsterdam Stock
Exchange, publishes the Eurotop family of indices
(FTSE.com)
</TABLE>
THE FINANCIAL TIMES NEWSPAPER
The FINANCIAL TIMES is a leading international daily business newspaper. Its
average audited daily circulation of 440,000 copies in December 1999, which was
14% greater than the prior year, gives the FINANCIAL TIMES the second largest
circulation of any English language business daily in the world. The FINANCIAL
TIMES derived approximately three-quarters of its revenue in 1999 from
advertising and approximately one-quarter from circulation. The geographic
distribution of the FINANCIAL TIMES' average daily circulation was:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
UK AND REPUBLIC OF IRELAND 44%
<S> <C>
Continental Europe, Middle Ease and Africa 29%
Americas 23%
Asia 4%
</TABLE>
The FINANCIAL TIMES draws upon an extensive network of international
correspondents and its editorial skills to produce unique, informative and
timely business information. We believe that we
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have the largest number of correspondents of any English language daily
newspaper in the world. For production and distribution, the FINANCIAL TIMES
uses computer-driven communications and printing technology for timely delivery
of the various editions of the newspaper to the appropriate geographic markets.
In 1998, we established printing sites in Milan, Chicago, Boston and San
Francisco, improved our distribution network in the US and began a sustained
marketing effort centered in the US and Europe.
Increased corporate finance, merger and acquisition activity and European
economic integration have fuelled the appetite for increased business coverage
in Europe. To add to our pan-European pre-eminence with the FINANCIAL TIMES, the
FT Group, in partnership with Gruner + Jahr, a subsidiary of Bertelsmann AG, the
German media group, recently inaugurated FINANCIAL TIMES DEUTSCHLAND and its
related online business news and data service. FINANCIAL TIMES DEUTSCHLAND
provides German-language coverage of business issues that is complementary to
the FINANCIAL TIMES' international coverage.
In 1999, the FINANCIAL TIMES, THE WALL STREET JOURNAL and Independent Media
(publisher of THE MOSCOW TIMES) jointly launched VEDOMOSTI, a daily Russian
language business newspaper. Drawing content from a staff of 20 Russian
reporters, as well as translated pieces from both the FINANCIAL TIMES and THE
WALL STREET JOURNAL, VEDOMOSTI plans to expand from its present circulation in
Moscow and St. Petersburg into a national daily newspaper.
FINANCIAL TIMES INTERNET BUSINESSES
Under the FT brand, we distribute business and personal finance information
to a global audience via the internet. We maintain and continue to extend a
network of leading European and US business and financial news, private investor
and personal finance web services. To date, our internet investment has been
primarily focused on the development of FT.com. Our websites include:
- FT.COM, a leading global business information portal that combines
agenda-setting editorial content with comment and analysis, relevant
financial data, discussion groups, unique dossiers on key business people
and innovative tools to search the web, manage a working day and seek out
leisure opportunities,
- FTYOURMONEY.COM, an online source of independent personal finance
information and guidance aimed at consumers who seek to manage their own
finances better. FTYourMoney.com seeks to capitalize on the rapidly
growing personal finance market in the UK and then to roll-out similar
websites in other countries, and
- FTMARKETWATCH.COM, a joint venture between the FT Group and
MarketWatch.com that launched in June 2000, provides free, real-time
financial and market news to Europe's community of private investors. The
new website is modelled on CBS.MarketWatch.com. Through our ownership of
Data Broadcasting Corporation, we also own 34% of MarketWatch.com.
The following operating statistics show that, similar to the FINANCIAL
TIMES, FT.com has quickly shown an ability to attract a large number of users:
<TABLE>
<CAPTION>
JANUARY FEBRUARY MARCH
-------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Users.......................................... 1.0 1.1 1.2
Page views..................................... 18.0 22.0 24.0
</TABLE>
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FT INTERACTIVE DATA
FT Interactive Data supplies market data to US and UK securities
professionals, including trading houses, custodians and fund managers. Its most
significant activity in sales is the supply of database services, which are
primarily delivered electronically, covering a wide range of pricing, dividend,
corporate action and descriptive information. FT Interactive Data has a database
of 3.5 million securities, including hard-to-value, fixed income instruments.
This information allows institutional investors efficiently to value their
portfolios. FT Interactive Data operates under the trade name Interactive Data
Corporation in the US and EXSHARE in the UK. FT Interactive Data also operates
FTSE International, a joint venture with the London Stock Exchange, that
provides the professional investment community with the FTSE 100 and European
economic and market indices.
In 1999, we acquired the Thomson Financial Securities business, a unit of
the Thomson Corporation. These assets include Muller Data Corporation and
Muniview, municipal bond valuation businesses based in the US, and Valorinform,
an international valuation business based in the UK. In February 2000, FT
Interactive Data merged with Data Broadcasting Corporation, a Nasdaq-listed
company that is one in the leading providers of real-time financial market data
to traders and individual investors. We own a 60% stake in the combined
business.
FINANCIAL TIMES BUSINESS
Financial Times Business provides magazines and web services for
professionals in the finance and energy sectors. It publishes the UK personal
finance magazine INVESTORS CHRONICLE, as well as THE BANKER, MONEY MANAGEMENT
and FINANCIAL ADVISER. Its energy business, based in the US, operates under the
brands Research Data International and E-Source and produces management studies,
consultancy work and newsletters.
LES ECHOS GROUP
The Les Echos Group publishes newspapers and magazines for the French
speaking market. The French language financial newspaper, LES ECHOS, has the
highest daily circulation of any business newspaper in France. LesEchos.com, the
newspaper's website, is the leading business website in France. The Les Echos
Group also publishes a business magazine called ENJEUX-LES ECHOS.
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RECOLETOS
We have a 99.6% stake in Recoletos, a Spanish media group that we built with
its Spanish promoters over several years. Recoletos' publishing businesses in
Spain and Portugal include MARCA, a leading sports newspaper for the region with
an average annual circulation of 397,000 in 1999, EXPANSION, a daily business
newspaper, ACTUALIDAD ECONOMICA, a weekly business magazine, and TELVA, a
monthly women's magazine. It is also developing its internet activities as it
seeks to extend the reach of its print-based products. The group has announced
plans for a public offering of a minority stake.
INVESTMENTS AND ASSOCIATES
In addition to interests outlined elsewhere, we hold non-controlling
interests in several other media companies, including a 50% stake in The
Economist Group, which owns THE ECONOMIST, an international weekly current
affairs and business magazine. We also own a 50% stake in BUSINESS DAY and
FINANCIAL MAIL, the leading daily and leading weekly financial publications in
South Africa, respectively.
THE PENGUIN GROUP
Penguin is one of the premier English language publishers in the world. We
publish an extensive range of titles, including the very best new fiction and
non-fiction, literary prize winners and commercial blockbusters. Our titles
range from history and science to essential reference. We are also one of the
pre-eminent classics publishers and own some of the most highly prized and
enduring brands in children's publishing, featuring popular characters such as
Spot, Peter Rabbit and Madeline, as well as the books of Roald Dahl. We rank in
the top three in all major English speaking markets--the US, UK, Australia, New
Zealand, Canada, India and South Africa. The Penguin Group combines a frontlist
of new books by best-selling authors with a backlist of more than 25,000 popular
titles. In 1999, Penguin Group titles spent a record 262 weeks on THE NEW YORK
TIMES bestseller lists and, in the UK, the Penguin Group nearly doubled its
share of THE GUARDIAN'S Top 100 Bestsellers. In 1999, the Penguin Group had
sales of L565 million, representing 17% of Pearson's total sales.
Revenues are split approximately evenly between frontlist and backlist
titles, minimizing Penguin's exposure to volatility in either market. The
Penguin Group earns over 90% of its revenues from the sale of hard cover and
paperback books. The balance comes from audio books and from the sale and
licensing of intellectual property rights, such as the Beatrix Potter series of
fictional characters. We also sell a range of titles on CD-ROM and cassette and
act as a book distributor for a number of smaller publishing houses.
We sell directly to bookshops and through wholesalers. Retail bookshops
normally maintain relationships with both publishers and wholesalers and use the
channel which best serves the specific requirements of an order. In the last few
years, we have also seen a significant growth in online purchasing directly by
consumers, which currently accounts for approximately 5% of US sales and a
growing percentage of UK sales.
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<PAGE>
We publish under the following imprints and have many well known authors.
<TABLE>
<CAPTION>
<S> <C> <C>
PENGUIN GROUP IMPRINTS PENGUIN'S REPRESENTATIVE
------------------------------------------------------------ -----------------------------
ADULT CHILDREN AUTHORS
----------------------------- ----------------------------- -----------------------------
Penguin Dial Tom Clancy
Putnam Dutton Patricia Cornwell
Avery Viking Clive Cussler
Berkley Books Ladybird Dick Francis
Dutton Penguin Alex Garland
Hamish Hamilton Puffin Sue Grafton
Michael Joseph Frederick Warne Nick Hornby
Plume Beatrix Potter
Signet Sue Townsend
Viking
</TABLE>
The Penguin Group's gateway internet site, Penguin.com, provides access to
its focused websites in the US, Canada, UK and Australia. Websites have also
been developed to target certain niche audiences. For example,
Penguinclassics.com has an entire online world for the classics--with
anthologies, original essays, interviews and discussions and links to other
classics sites. It is the favored classics site on Amazon UK. In addition, we
have developed the award-winning PeterRabbit.com and we are extending rapidly
our range of author websites, live webcasts and subject-specific sites, such as
one for readers of romance novels. The Penguin Group aims to use the internet to
increase the commercial efficiency of its existing publishing operations and to
exploit its popular brands and unique content, and to continue to convert its
library into digital formats suitable for e-book delivery, printing on demand
and other forms of distribution.
On May 12, 2000, we completed our acquisition of Dorling Kindersley Holdings
plc, or DK, an international publisher of illustrated reference books, for
L310 million.
We believe that the combination of DK, the Penguin Group and Pearson's
educational and other businesses will provide us with strategic benefits,
including:
- COMPLEMENTARY PRODUCT LINES. DK's illustrated reference books are distinct
from Penguin's existing product lines, providing access to new and
sophisticated customers in both English-speaking and foreign markets.
- MARKET COVERAGE. Many of DK's illustrated products will reinforce our ages
4-18 market coverage and take the Penguin Group into large segments of the
consumer market where we are not currently present. DK also takes the
Penguin Group into non-English language markets and provides the basis for
establishing local publishing operations outside the English speaking
world founded on illustrated books with international appeal.
- DIGITAL ILLUSTRATION LIBRARY AND NEW MEDIA OPPORTUNITIES. This acquisition
provides the Penguin Group and other Pearson operating companies with a
digitized, primarily wholly-owned library of high quality text and
picture-based intellectual property. We can develop and use this library
as a digital platform for e-books, online education products and other new
formats in the future.
- ENHANCED RETURN DUE TO SYNERGIES. The combination with the Penguin Group
will allow DK to realize substantial economies of scale and integration
savings.
- BUSINESS EXTENSIONS. DK provides a large and immediate opportunity for two
of our operating companies, the Penguin Group and Pearson Education, to
integrate DK's brand and database content into their markets in
appropriate formats. Its reference books, for instance, will enhance the
research service of the education network as well as provide supplemental
products to be sold by Pearson Education's large sales force.
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PEARSON TELEVISION
On July 25, 2000, Pearson Television was merged with CLT-Ufa, the television
and broadcasting business owned by Germany's Bertelsmann AG, and Belgium's
Audiofina, to create the RTL Group. The combined company is an integrated
pan-European company with activities in television production, online delivery
and broadcasting, including the well-known RTL television stations. The RTL
Group is Europe's largest radio and television broadcast company by revenue and
is listed on the London Stock Exchange. The terms of the merger, which closed on
July 25, 2000, provide that we will own a 22% interest in the RTL Group. We
currently own 20.5% of the group, which will increase to 22% upon the transfer
of certain remaining assets of Pearson Television. This transfer remains subject
to government approvals.
Marjorie Scardino, our chief executive officer, and John Makinson, our
finance director, are directors. Pearson Television's former chief executive,
Richard Eyre, will be the RTL Group's executive director responsible for content
and strategy.
In 1999, Pearson Television had sales of L355 million, or 10% of Pearson's
total sales.
COMPETITION
All of Pearson's businesses operate in highly competitive environments.
Pearson Education competes with other publishers and creators of educational
materials. These companies include large international companies, such as
McGraw-Hill, Houghton Mifflin and Thomson. Competition is based on the ability
to deliver quality products that appeal to the school boards, educators and
government officials making purchasing decisions, at competitive prices. NCS
competes with numerous commercial processors of student assessment tests
including in-house systems, national and regional providers, data processing
service bureaus and test publishers.
FT Group competes with other companies engaged in the publishing of business
news, such as THE WALL STREET JOURNAL. The FT Group competes with other
newspapers and information sources for readership by offering timely and expert
journalism, and competes for advertisers with other forms of media based on the
ability to offer an effective means for advertisers to reach their target
audience.
The Penguin Group competes with other publishers of fiction and non-fiction
books. As such, principal competitors include Random House and Harper Collins.
Publishers compete by developing a portfolio of books that are in demand by
continually seeking out and promoting talented writers and by offering their
works at competitive prices.
INTELLECTUAL PROPERTY
Our principal intellectual property assets consist of our trademarks and
other rights in our brand names, particularly Financial Times and Penguin and
the various imprints of Pearson Education, and copyrights in our content. We
believe we have taken all appropriate available legal steps to protect our
intellectual property in all relevant jurisdictions.
RAW MATERIALS
Paper is one of the principal raw materials used by each of Pearson
Education, the FT Group and the Penguin Group. We purchase most of our paper
through our central purchasing department located in the US. We have not
experienced and do not anticipate difficulty in obtaining adequate supplies of
paper for their operations, with sourcing available from numerous suppliers.
While local prices fluctuate depending upon local market conditions, we have not
experienced extensive volatility in fulfilling paper requirements.
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<PAGE>
GOVERNMENT REGULATION
The manufacture of certain of our products in various markets is subject to
governmental regulation relating to the discharge of materials into the
environment. Our operations are also subject to the risks and uncertainties
attendant to doing business in numerous countries. Some of the countries in
which we conduct these operations maintain controls on the repatriation of
earnings and capital and restrict the means available to us for hedging
potential currency fluctuation risks. The operations that are affected by these
controls, however, are not material to Pearson as a whole. Accordingly, these
controls have not significantly affected our international operations.
Regulatory authorities may have enforcement powers that could have an impact on
us. We believe, however, that we have taken and continue to take measures to
comply with all applicable laws and governmental regulations in the
jurisdictions where we operate so that the risk of these sanctions does not
represent a material threat to us.
We have minority investments in a number of broadcasting entities that hold
licenses granted by various governmental authorities. These licenses generally
are subject to renewal at prescribed periods and are subject to forfeiture for
failure to comply with the rules and regulations of these authorities. We hold
investments in entities that are dependent upon these licenses, but we are not
dependent upon any particular licenses.
ORGANIZATIONAL STRUCTURE
We have interests in subsidiaries and other entities throughout the world.
Below is a list of our significant subsidiaries, including name, country of
incorporation or residence, proportion of ownership interest and, if different,
proportion of voting power held.
<TABLE>
<CAPTION>
COUNTRY OF INCORPORATION/ PERCENTAGE INTEREST/
NAME RESIDENCE VOTING POWER
---- ------------------------- --------------------
<S> <C> <C>
Pearson Inc.................... United States 100
Pearson AG..................... Switzerland 100
Whitehall Electric Investments
Limited...................... England and Wales 100
Whitehall Trust................ England and Wales 100
Rycade Capital Corporation
Inc.......................... United States 100
Financial Times Limited........ England and Wales 100
FT Group Limited............... England and Wales 100
Prentice Hall Inc.............. United States 100
Pearson Business Services
Inc.......................... United States 100
Data Broadcasting
Corporation.................. United States 60
</TABLE>
HISTORY AND DEVELOPMENT
During the past three years, we have concentrated on developing our four
media business divisions: education, business information, consumer publishing
and television. In 1997, we acquired All American Communications, a US
television producer, for L247 million. We also obtained a 24% stakeholding in
Channel 5, the fifth UK terrestrial television channel, and made a financial
commitment of L47 million. This later increased to 29%. Our largest acquisition
was in 1998, when we acquired the educational, business & professional and
reference publishing businesses of Simon & Schuster from Viacom
International Inc. for L2,868 million. We combined these publishing units with
Addison Wesley Longman to form the world's largest educational
publisher--Pearson Education. In 1999, we acquired the Thomson Financial
Securities Management business, a unit of The Thomson Corporation, for
L93 million. In February 2000, we merged our FT Interactive Data business, which
was then called FT Asset Management, with Data Broadcasting Corporation, one of
America's leading providers of real-time financial market data to traders and
individual investors. The FT Group has retained a 60% stake in the combined
business.
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<PAGE>
On June 29, 2000, we announced the purchase, for $129 million, of an 87%
Interest in FamilyEducation Network, Inc., or FEN, an online network for
parents, teachers and students.
On May 12, 2000, we completed the acquisition of DK, an international
illustrated reference publisher, for L310 million. We will combine DK with the
Penguin Group.
On July 25, 2000, Pearson Television merged with CLT-Ufa to form the RTL
Group, a pan-European integrated broadcast and content company in which we will
retain a 22% interest.
On July 31, 2000, we announced our agreement to acquire NCS for
approximately $2.5 billion.
To focus on our four principal businesses, we have disposed of several
ancillary businesses over the last three years. In 1997, we sold Churchill
Livingstone, a medical publishing business, for L57 million. In 1998, we sold
our Law & Tax publishing business for L66 million and Pearson New Entertainment,
which included Future Publishing, a consumer magazine business, for
L125 million. Also in 1998, we sold Mindscape Inc., a developer and publisher of
consumer software, for L91 million and The Tussauds Group, our visitor
attractions business, for L352 million. In September 1999, we sold our
investment in BSB Holdings Ltd. to Vivendi for L408 million.
During 1999, we also sold six of Simon & Schuster's business & professional
and reference publishing businesses, which did not fit with the rest of Pearson
Education's operations, for an aggregate of L209 million. The businesses sold
included the following:
- Macmillan Library Reference USA Inc., a publisher of materials for high
school, college and public libraries, for L52 million,
- Macmillan General Reference USA Inc., a full range reference book
publisher, for L50 million,
- Jossey-Bass Inc. Publishers, a diversified publisher of business
management books and journals, for L49 million, and
- Appleton & Lange Inc., a medical textbook company for L28 million.
On March 3, 2000, we completed the sale of our interests in the Lazard
Houses for L410 million paid at closing, together with dividend payments
totalling L26 million.
PROPERTY, PLANT AND EQUIPMENT
Our headquarters is located at leasehold premises in London, England. We own
or lease approximately 280 properties in 24 countries worldwide, the majority of
which are located in the UK and the US.
All of the properties owned and leased by us are suitable for their
respective purposes and are in good operating condition.
We own the following principal properties:
<TABLE>
<CAPTION>
GENERAL USE OF PROPERTY LOCATION AREA IN SQUARE FEET
----------------------- ---------------------------------- --------------------
<S> <C> <C>
Warehouse......................... Pittstown, Pennsylvania, US 510,000
Warehouse......................... West Nyack, New York, US 501,912
Warehouse......................... Kirkwood, New York, US 409,000
Offices/Warehouse................. Ringwood, Victoria, Australia 274,159
Offices........................... Old Tappan, New Jersey, US 212,041
Warehouse......................... Harlow, UK 164,853
Offices........................... Reading, Massachusetts, US 158,527
Offices........................... Stoneham, Massachusetts, US 48,769
</TABLE>
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<PAGE>
We lease the following principal properties:
<TABLE>
<CAPTION>
GENERAL USE OF PROPERTY LOCATION AREA IN SQUARE FEET
----------------------- ---------------------------------- --------------------
<S> <C> <C>
Offices........................... Upper Saddle River, New Jersey, US 474,801
Offices........................... Hudson, New York, US 271,952
Warehouse/Offices................. Harmondsworth, UK 250,658
Warehouse......................... Bittleswell, UK 210,000
Offices........................... London, UK 152,986
Offices........................... Harlow, UK 98,000
Offices........................... Madrid, Spain 72,839
Offices........................... Bedford, Massachusetts, US 64,349
</TABLE>
EMPLOYEES
The average number of persons employed by us during each of our last three
fiscal years were as follows:
- 18,306 in fiscal 1997,
- 18,400 in fiscal 1998, and
- 23,872 in fiscal 1999.
The significant increase in the number of our employees in 1999 resulted
from the Simon & Schuster acquisition in November 1998.
We, through our subsidiaries, have entered into collective bargaining
agreements with employees in various locations. Our management has no reason to
believe that we would not be able to renegotiate any such agreements on
satisfactory terms. We encourage employees to contribute actively to the
business in the context of their particular job roles and believe that the
relations with our employees are generally good. We do not employ a significant
number of temporary employees.
The table set forth below shows for 1999 the average number of persons
employed in each of our operating divisions in the UK, the US, other locations
and in total.
<TABLE>
<CAPTION>
BUSINESS UNIT UK US OTHER TOTAL
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Pearson Education........................................... 1,761 9,970 2,394 14,125
FT Group.................................................... 2,158 1,034 1,790 4,982
The Penguin Group........................................... 749 1,866 614 3,229
Pearson Television.......................................... 617 105 550 1,272
Other....................................................... 171 93 - 264
----- ------ ----- ------
Continuing Operations....................................... 5,456 13,068 5,348 23,872
</TABLE>
LEGAL PROCEEDINGS
We and our subsidiaries are defendants in a number of legal proceedings
including, from time to time, government and arbitration proceedings, which are
incidental to our and their operations. We do not expect that the outcome of
pending proceedings, either individually or in the aggregate, will have a
significant effect on our financial position or profitability nor have any such
proceedings had any such effect in the recent past. To our knowledge, there are
no material proceedings in which any member of senior management or any of our
affiliates is a party adverse to us or any of our subsidiaries or in respect of
which any of those persons has a material interest adverse to us or any of our
subsidiaries.
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<PAGE>
MANAGEMENT
DIRECTORS AND SENIOR MANAGEMENT
We are managed by our board of directors and, under the direction of the
board, by the Pearson management committee. We refer to the executive director
members of the board of directors, the chairman of the board of directors and
the chief executives of each of the four operating divisions as our "senior
management".
The following table sets forth information concerning each of our directors
and members of senior management, as of June 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Lord Stevenson............................ 55 Chairman
Marjorie Scardino......................... 53 Chief Executive, Director
David Bell................................ 53 Director for People
John Makinson............................. 45 Finance Director
Lord Burns................................ 56 Non-executive Director
Gillian Lewis............................. 56 Non-executive Director
Reuben Mark............................... 61 Non-executive Director
Vernon Sankey............................. 51 Non-executive Director
Rana Talwar............................... 52 Non-executive Director
Peter Jovanovich.......................... 51 Chief Executive of Pearson Education
Stephen Hill.............................. 40 Chief Executive of the FT Group
David Wan................................. 46 Chief Executive of the Penguin Group
Richard Eyre.............................. 46 Chief Executive of Pearson Television
</TABLE>
LORD STEVENSON has been a non-executive director since 1986 and became
executive chairman in 1997. He is a member of our treasury committee. He is also
chairman of Halifax plc and AerFi Group plc, and a non-executive director of
Manpower Inc.
MARJORIE SCARDINO joined the board and became chief executive in
January 1997. She trained and practiced as a lawyer for nine years from 1976 to
1985, and published a weekly newspaper in the US for seven years from 1978 to
1985. In 1985, she joined The Economist Group as president of its North American
operations and was its chief executive from 1993 until joining us. She is also a
non-executive director of America Online Inc. and of ConAgra Inc.
DAVID BELL became a director in March 1996 and became chairman of the FT
Group in 1996. He was chief executive of the FINANCIAL TIMES from 1993 to 1998.
In July 1998, he was appointed our director for people with responsibility for
the recruitment, motivation, development and reward of employees. He is also a
non-executive director of VITEC Group plc and chairman of the Millennium Bridge
Trust.
JOHN MAKINSON became finance director in March 1996. From 1994 to 1996 he
was managing director of the FINANCIAL TIMES, and prior to that he founded and
managed the investor relations firm Makinson Cowell. He is also a non-executive
director of George Weston Limited in Canada. He is a member of our treasury
committee.
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<PAGE>
LORD BURNS became a non-executive director in 1999 and currently serves on
our audit and personnel committees. He was the UK government's chief economic
advisor from 1980 until 1991 and Permanent Secretary of HM Treasury from 1991
until 1998. He is a non-executive director of Legal & General Group plc and of
Queens Park Rangers Football Club.
GILLIAN LEWIS became a non-executive director in 1992 and currently serves
as the chair of our personnel committee. She has been managing partner of
Heidrick & Struggles in the UK, the Republic of Ireland, Middle East and the
Republic of South Africa since 1998. Prior to becoming managing partner of UK
operations at Heidrick & Struggles, she was the practice managing partner for
the consumer practice of Heidrick & Struggles.
REUBEN MARK became a non-executive director in 1988 and currently serves on
our audit and personnel committees. He became chief executive of the Colgate
Palmolive Company in 1984, and became chairman in 1986. He has held these
positions since then. He is also a director of Citigroup Inc. and of Time
Warner Inc.
VERNON SANKEY became a non-executive director in 1993 and currently serves
as the chair of our audit committee and as a member of our treasury committee.
He is non-executive chairman of Thomson Travel Group plc and a non-executive
director of Allied Zurich plc, Zurich Allied AG and Zurich Financial Services.
He is also a board member of the Food Standards Agency and a member of the
International Advisory Board for Korn/Ferry International.
RANA TALWAR became a non-executive director in March 2000. He has been chief
executive of Standard Chartered plc since 1998 and a governor of the London
Business School since 1999. He is also currently a governor of the Indian School
of Business. He was at Citicorp from 1969 to 1997, where he held a number of
senior international management roles.
PETER JOVANOVICH became chairman and chief executive of Addison Wesley
Longman in 1997. In 1998, following the Simon & Schuster acquisition, he became
chief executive of Pearson Education. He also serves on the board of the
Association of American Publishers and the board of the Alfred Harcourt
Foundation. Prior to that he was president of McGraw-Hill's Educational and
Professional Publishing Group from 1995 to 1997, and its chairman in 1997.
STEPHEN HILL has been chief executive officer of the FT Group since 1998.
From 1996 to 1998, he was the chief executive officer of the FINANCIAL TIMES.
Prior to that, from June 1995, he was chief executive of Westminster Press.
DAVID WAN became chief executive officer of the Penguin Group in
January 2000. From 1998 to January 2000, he was chief financial officer of the
Penguin Group. From 1989 to 1998, he was President of Simon & Schuster's US
school publishing business, which we acquired in 1998.
RICHARD EYRE became chief executive of Pearson Television in January 2000.
Prior to January 2000, he was chief executive of Capital Radio from 1991 to 1997
until he became chief executive of ITV Network in 1997. On July 25, 2000,
Pearson merged Pearson Television into the RTL Group. Effective on that date,
Mr. Eyre ceased being a member of our senior management.
COMPENSATION OF SENIOR MANAGEMENT
The main components of compensation for our senior management are base
salary, annual bonuses, long-term incentives, pension benefits and other market
specific benefits.
BASE SALARY
Base salaries are set at levels that we believe are competitive with pay for
directors and executives in similar positions in comparable companies.
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ANNUAL BONUS
Annual bonus awards for senior management and some executives can be up to
100% of their annual base salary. In order to receive the maximum bonus, an
employee must meet financial targets set by the personnel committee of the
board. In 1999, those targets related to our stated goals of increasing earnings
per equity share, revenue growth, margin improvement and cash generation. With
respect to members of our management committee who are not directors, 80% of
their bonus relates to the performance of the operating division of which they
are chief executive, and the remaining 20% relates to our performance overall.
The bonus given to Greg Dyke, the former executive director and chief executive
officer of Pearson Television, also relates to the performance of Pearson
Television. The personnel committee of the board will continue to review our
bonus plans and has the authority to revise the bonus limits and targets in the
future. The personnel committee also may award individual discretionary bonuses.
The personnel committee did not award discretionary bonuses for 1999. Bonuses
are not considered pensionable earnings.
LONG-TERM INCENTIVE PLANS
Long-term incentive plans are intended to align the interests of senior
management and other employees with those of shareholders. The personnel
committee reviews the operation of long-term incentive plans on a regular basis,
taking into account UK legislative and regulatory developments, particularly
with regard to performance targets and evolving UK best practice.
PEARSON REWARD PLAN
In 1999, our shareholders approved adoption of a new long-term incentive
plan called the Pearson reward plan. Awards under this plan have been made in
1999 and 2000. The plan has two elements:
- premium-priced options linked to the rise in our share price over three to
seven years, and
- our ordinary shares in the form of equity incentives, for the 1999 award
linked to the three-year cumulative growth in our free cash flow.
The personnel committee has the option to consider and specify other
criteria for making awards. Recipients are not eligible for grants of
conventional options under our share option plans in any year they receive an
award under the Pearson reward plan. The chairman of the board of directors is
not eligible for this plan.
ANNUAL BONUS SHARE MATCHING PLAN
In 1998, our shareholders approved a share matching plan that permits senior
management and other senior executives, excluding the chairman of the board, to
take up to 50% of the after-tax value of an annual bonus in the form of our
ordinary shares. We will match these shares on a before-tax basis at a rate of
one matching share for every two shares held for three consecutive years, with
an additional share for every two shares held for a total of five consecutive
years. However, we only will match if we employ the potential recipient at the
time of the grant and if we experience real average growth in our adjusted
earnings per share of at least 3% per year during the relevant period.
INCENTIVE SHARE PLAN
We introduced our incentive share plan in 1993 to reward senior management
and a select group of other senior executives based on our performance over the
medium to long-term, as measured by total shareholder return relative to the
average of the FTSE 100 total return index. The three-year performance period
for the incentive share plan awards we made in 1997 ended on
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December 31, 1999. Since our total shareholder return outperformed that of the
FTSE 100 by 105% over the three-year period and our adjusted earnings per equity
share for 1999 were higher than those for 1996, 150% of the shares awarded in
1997 were released to the participants in 1999. There remains one outstanding
award, relating to Lord Stevenson, which matures in April 2002. No new awards
will be made under this plan.
EXECUTIVE SHARE OPTION PLAN
In 1998, our shareholders approved an executive share option plan pursuant
to which options are awarded to senior management and other executives and
managers, based on guidelines approved by our personnel committee. These
guidelines govern the total number of options that may be granted and the
frequency of awards to individual grantees. Options awarded under this plan are
granted at value on the date of grant. The chairman of the board is not eligible
to participate in this plan.
SPECIAL SHARE OPTION PLAN
In 2000, we made a special award of share options to some of our key
employees. In particular, we made awards to people working on our internet
initiatives.
RESTRICTED SHARES
In addition to share options and performance shares, awards of restricted
shares have been granted in 2000 to certain people working on our internet
initiatives.
RETIREMENT BENEFITS
In 1999, we accrued or set aside L0.6 million for the pension, retirement or
similar benefits of senior management.
NON-EXECUTIVE DIRECTORS' REMUNERATION
The board of directors determines fees for non-executive directors with
regard to market practice and within limits contained in our articles of
association. The board reviews these fees annually with the assistance of an
outside advisor. Non-executive directors receive no pay or benefits other than
reimbursement for expenses incurred in connection with their directorships and
do not participate in our annual bonus plan, incentive share plan or share
option plan.
Since January 1995, non-executive directors have received an annual fee of
L25,000 each. One overseas-based director is paid a supplement of L7,000 per
annum. The non-executive directors who chair the personnel and audit committees
of the board each receive an additional fee of L5,000 per annum. Starting in
January 2000, non-executive director fees were increased by L10,000 per annum,
which may be taken in the form of our ordinary shares.
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<PAGE>
REMUNERATION OF SENIOR MANAGEMENT
Excluding contributions to pension funds and related benefits, senior
management remuneration for 1999 was as follows:
<TABLE>
<CAPTION>
RELEASE OF AWARDS
MADE IN 1997
UNDER THE
INCENTIVE SHARE
SALARIES/FEES BONUS OTHER(1) PLAN TOTAL
------------- -------- -------- ----------------- --------------
(IN L THOUSANDS)
<S> <C> <C> <C> <C> <C>
CHAIRMAN
Lord Stevenson....................... 268 - - - 268
EXECUTIVE DIRECTORS
Marjorie Scardino.................... 465 465 54 1,533 2,517
David Bell........................... 270 270 17 589 1,146
Greg Dyke(2)......................... 215 122 10 - 347
John Makinson........................ 310 310 15 - 635
Senior management as a group
(9 persons)(3)..................... 2,433 1,875 110 2,122 6,540
</TABLE>
------------------------
(1) For Marjorie Scardino, David Bell, Greg Dyke and John Makinson, "other"
includes company car and health care benefits. Also included in "other" for
Marjorie Scardino is L34,180 in respect of housing costs.
(2) Greg Dyke resigned as an executive director and chief executive officer of
Pearson Television in 1999.
(3) Includes the chief executives of the four operating divisions. We are not
required to make public disclosure of individual compensation arrangements
of non-directors in the UK and, therefore, do not include individual
disclosure of the compensation paid to the chief executives of our four
operating divisions in this prospectus. As stated in footnote 2 above, the
senior management remuneration table also includes remuneration paid to Greg
Dyke, who was a director and the chief executive officer of Pearson
Television in 1999.
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<PAGE>
SHARE OPTIONS OF SENIOR MANAGEMENT
This table sets forth for each director, and for members of senior
management as a group, the number of share options held as of June 30, 2000 as
well as the exercise price and the range of expiration dates of these options.
<TABLE>
<CAPTION>
OPTIONS HELD EXERCISE PRICE (IN PENCE)
------------- -------------------------
<S> <C> <C>
Lord Stevenson........................... 2,243 769(1)
--------- --------
Total.................................... 2,243
=========
Marjorie Scardino........................ 163,300 1,090(1)
2,535 769(1)
33,557 1,537(2)
33,557 1,845(2)
33,557 2,152(2)
33,021 2,579(2)
33,021 3,095(2)
33,021 3,611(2)
--------- --------
Total.................................... 365,569
=========
David Bell............................... 26,500 654(1)
18,300 1,090(1)
1,186 436(1)
596 578(1)
581 593(1)
448 769(1)
165 1,022(1)
181 1,599(1)
16,701 1,537(2)
16,701 1,845(2)
16,701 2,152(2)
16,684 2,579(2)
16,684 3,095(2)
16,684 3,611(2)
--------- --------
Total.................................... 148,112
=========
John Makinson............................ 50,000 635(1)
18,000 545(1)
32,800 654(1)
66,000 758(1)
27,300 1,090(1)
2,984 578(1)
19,176 1,537(2)
19,176 1,845(2)
19,176 2,152(2)
19,068 2,579(2)
19,068 3,095(2)
19,068 3,611(2)
--------- --------
Total.................................... 311,816
=========
Senior management as a group
(8 persons)(3)......................... 1,392,437
</TABLE>
------------------------
(1) Granted under the share option plans and exercisable between 2000 and 2008.
(2) Granted under the Pearson reward plan and exercisable between 2001 and 2009.
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(3) Includes the chief executives of the four operating divisions. We are not
required to make public disclosure of individual compensation arrangements
of non-directors in the UK and, therefore, do not include individual
disclosure of the option information for the chief executives of our four
operating divisions in this prospectus.
SHARE OWNERSHIP OF SENIOR MANAGEMENT
The table below sets forth the number of ordinary shares held by each of our
directors, and by members of senior management as a group, as at June 30, 2000.
Additional information with respect to the share options held by, and bonus and
incentive awards for, these persons is set out above in "Remuneration of Senior
Management" and "Share Options of Senior Management". The total number of
ordinary shares held by senior management as of June 30, 2000 was 274,312,
representing less than 1% of the issued share capital on June 30, 2000.
<TABLE>
<CAPTION>
INCENTIVE SHARE ANNUAL
PLAN AND PEARSON BONUS
OPTIONS-ORDINARY REWARD PLAN MATCHING
ORDINARY SHARES(1) SHARES ORDINARY SHARES(2) SHARES(3)
------------------ ---------------- ------------------ ------------------------
<S> <C> <C> <C> <C>
Lord Stevenson................... 70,788 2,243 65,807 -
Marjorie Scardino................ 55,770 365,569 104,661 40,139
John Makinson.................... 17,598 311,816 59,989 22,621
David Bell....................... 32,516 148,112 52,318 14,406
Senior management as a group
(8 persons)(4)................. 274,312 1,392,437 382,665 120,222
</TABLE>
------------------------
(1) Amounts include shares acquired by individuals under the annual bonus
matching plan.
(2) The number of ordinary shares shown represents the maximum number of
ordinary shares, plus, in the case of the incentive share plan, accumulated
share dividend ordinary shares included in the original award that may be
transferred to the employee.
(3) These ordinary shares are held in trust and represent the maximum award
required to provide our matching contribution of ordinary shares in respect
of that part of the bonus taken in ordinary shares by each director. The
ordinary shares only vest if the performance and other conditions of the
plan are met.
(4) Includes the chief executives of the four operating divisions. We are not
required to make public disclosure of individual compensation arrangements
of non-directors in the UK and, therefore, do not include individual
disclosure of the shares and share options held by the chief executives of
its four operating divisions in this prospectus.
Our executive directors, as possible beneficiaries, are also deemed to be
interested in Pearson Employee Share Trust Limited, the trustee of which held
754,318 of our ordinary shares on June 30, 2000.
EMPLOYEE SHARE OWNERSHIP PLANS
PROFIT SHARING PLAN
Since 1998, we have operated a profit sharing plan available to all
employees who:
- have worked for us for at least six months of the relevant fiscal year,
and
- we employ at the time we make payment under the plan.
All payments made under the plan are determined in the discretion of the
board after consideration of our profitability for the year. Payment under the
plan may be in the form of cash and/or our ordinary shares. Payment under the
plan was 3% of salary plus 15 ordinary shares for fiscal year 1998 and 2% of
salary plus 10 ordinary shares for fiscal year 1999. We intend to continue the
plan in fiscal year 2000.
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<PAGE>
SAVE-FOR-SHARES PLAN
In 1998, we introduced a worldwide save-for-shares plan. Under this plan,
our employees worldwide have the option to save a portion of their monthly
salary over periods of three, five or seven years. At the end of this period,
the employee has the option to purchase ordinary shares with the accumulated
funds at a purchase price equal to 80% of the market price prevailing at the
commencement of the employee's participation in the plan.
In the US, due to restrictions under US law, stock appreciation rights are
used instead of share options. The savings period is two years and the discount
to the market price is 15%. This arrangement will be replaced by a stock
purchase plan under Section 423 of the Internal Revenue Code of 1986 subsequent
to this offering.
BOARD PRACTICES
Our board of directors currently is comprised of four executive directors,
including the chairman, who is a part-time director, and five non-executive
directors. Our articles of association provide that at every annual general
meeting, one-third of the board of directors, or the number nearest to
one-third, shall retire from office. The directors to retire each year are the
directors who have been longest in office since their last election or
appointment. A retiring director is eligible for re-election. If at any annual
general meeting, the place of a retiring director is not filled, the retiring
director, if willing to continue, is deemed to have been re-elected, unless at
or prior to such meeting it is expressly resolved not to fill the vacated
office, or unless a resolution for the re-election of that director has been put
to the meeting and lost.
The board of directors has established the following committees, all of
which have written terms of reference setting out their authority and duties:
AUDIT COMMITTEE
Vernon Sankey chairs this committee and Lord Burns and Reuben Mark are
members. The "terms of reference" of the committee require that its members be
non-executive directors with financial and accounting experience. The committee
provides the board with a vehicle to appraise our financial management and
reporting and to assess the integrity of our accounting procedures and financial
controls. Our internal and external auditors have direct access to the committee
to raise any matter of concern and to report the results of work directed by the
committee. The committee reports to the full board of directors.
PERSONNEL COMMITTEE
Gillian Lewis chairs this committee and Lord Burns and Reuben Mark are
members. They all are non-executive directors. The committee meets regularly to
decide the remuneration and benefits packages of the executive directors and the
chief executives of our four operating divisions. The committee also recommends
the chairman's remuneration to the board of directors for its decision and
reviews our management development and succession plans.
TREASURY COMMITTEE
The members of this committee are Lord Stevenson, John Makinson and Vernon
Sankey. The committee sets the policies for our treasury department and reviews
its procedures on a regular basis.
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<PAGE>
PRINCIPAL STOCKHOLDERS
To our knowledge, as of June 30, 2000, no person or group was the beneficial
owner of 3% or more of our issued and outstanding ordinary share capital, except
for Telefonica Media SA which owned 30,527,674 ordinary shares representing
4.89% of our outstanding ordinary shares.
On July 24, 2000, 306 recordholders with registered addresses in the US held
63,907,606 ordinary shares, including those held through ADSs, which represented
approximately 10% of our outstanding ordinary shares. Because some of our
ordinary shares and ADSs are held by nominees, these numbers may not accurately
represent the number of beneficial owners in the US.
DESCRIPTION OF SHARE CAPITAL
SHARE CAPITAL
The ordinary shares, par value 25p, represent our only authorized class of
share capital. The table below sets forth:
- the number of ordinary shares authorized at the end of our 1999 fiscal
year and as of June 30, 2000,
- the number of ordinary shares issued as of June 30, 2000, and
- a reconciliation of the number of ordinary shares issued at the beginning
and end of our 1999 fiscal year and the number of ordinary shares issued
as of June 30, 2000.
<TABLE>
<CAPTION>
NUMBER LM
----------------------------- ------------
<S> <C> <C>
AUTHORIZED
At December 31, 1999........................................ 894,000,000 L224
As of June 30, 2000......................................... 916,000,000 229
----------------------------- ------------
ISSUED
At January 1, 1999.......................................... 609,554,547 152
Issued under share option and employee share plans during
1999.................................................... 3,115,620 1
----------------------------- ------------
At December 31, 1999........................................ 612,670,167 153
----------------------------- ------------
Issued under January 2000 share placing................... 11,500,000 3
----------------------------- ------------
Issued under share option and employee share plans during
2000.................................................... 1,052,766 0
----------------------------- ------------
As of June 30, 2000......................................... 625,222,933 L156
============================= ============
</TABLE>
The Pearson Employee Share Trust, an English trust we established to hold
ordinary shares to be distributed under various executive and employee share
plans and the two Pearson Employee Share Ownership Trusts established in Jersey,
which contain both ordinary shares held under options and restricted shares for
senior management and a selected group of other executives, together held
953,057 ordinary shares with a market value of L19 million on December 31, 1999.
As of June 30, 2000, these two trusts held 3,410,317 ordinary shares with a
market value of L72 million.
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<PAGE>
OUTSTANDING OPTIONS
The table below sets forth the outstanding options for our ordinary shares
as of December 31, 1999 and as of June 30, 2000:
<TABLE>
<CAPTION>
NUMBER OF NUMBER
OPTIONS OF OPTIONS
OUTSTANDING OUTSTANDING ORIGINAL
(DECEMBER 31, (JUNE 30, SUBSCRIPTION
DATE OF 1999) 2000) PRICE EXERCISE
GRANT (IN THOUSANDS) (IN THOUSANDS) (IN PENCE) PERIOD
-------- -------------- -------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Worldwide save-for-
shares plans 1992 39 -- 242 1997-2000
1994 100 84 509 1999-2002
1995 429 420 436 2000-2003
1996 335 330 578 2001-2004
1997 422 399 593 2000-2005
1998 1,225 1,151 769 2000-2006
1999 1,416 1,333 1,022-1,086 2001-2007
2000 -- 630 1,599-1,658 2003-2008
------ ------
Total: 3,966 4,370
====== ======
Executive share option
plans 1990 148 -- 307-334 1993-2000
1991 59 46 364-377 1994-2001
1992 100 53 327-379 1995-2002
1993 125 -- 396 1996-2003
1994 265 198 635 1997-2004
1995 438 266 545 1998-2005
1996 999 511 654-682 1999-2006
1997 2,410 2,208 744-757 2000-2007
1998 2,971 2,815 948-1,090 2001-2008
1999 3,479 3,383 1,210-1,285 2002-2009
2000 -- 5,909 2,501 2003-2010
------ ------
Total: 10,994 15,389
====== ======
</TABLE>
The subscription prices have been rounded down to the nearest whole pence.
HISTORY OF SHARE CAPITAL
In addition to issues under our scrip dividend plan and share option and
employee share plans, we have made two issuances of additional ordinary shares
during the last three years. In January 2000, we issued 11.5 million ordinary
shares, representing approximately 2% of our then existing issued ordinary share
capital. Those shares were subscribed for by institutional investors at a price
of L22.00 per share. The proceeds of that placement were to finance further
investment to expand existing and to develop new internet-related businesses. We
issued 28.9 million ordinary shares in August 1998, representing approximately
5% of our then existing issued ordinary share capital. These shares were
subscribed for by institutional investors at a price of L11.35 per share. The
proceeds of that placement were used to provide funds for the Simon & Schuster
acquisition. In addition, at our annual general meeting held on May 12, 2000, we
were authorized, subject to certain conditions, to acquire up to 62 million of
our ordinary shares by purchases in the open market.
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<PAGE>
MEMORANDUM AND ARTICLES OF ASSOCIATION
We summarize below the material provisions of our memorandum and articles of
association, which have been filed as an exhibit to the registration statement
of which this prospectus is a part.
We have multiple business objectives and purposes and are authorized to do
such things as the board may consider to further our interests or incidental or
conducive to the attainment of our objectives and purposes. We are registered
with the Registrar of Companies and our entry number is 53723.
INTERESTED DIRECTORS
A director shall not be disqualified from contracting with us by virtue of
his or her office or from having any other interest, whether direct or indirect,
in any contract or arrangement entered into by or on behalf of us. An interested
director must declare the nature of his or her interest in any contract or
arrangement entered into by or on behalf of us at the first meeting of directors
at which any such contract or arrangement is discussed or the first meeting of
directors after the director has obtained an interest in the contract or
arrangement. If a director wishes to enter into a contract with us to sell or
purchase substantial non-cash property interests (defined as being greater than
L2,000 and exceeding the lesser of L100,000 or 10% of our net assets), approval
by the shareholders in a general meeting is required. Directors' interests in
contracts or arrangements entered into by or on behalf of us must be disclosed
in the notes to our audited annual accounts. A director may not vote on any
contract or arrangement or any other proposal in which he or she has, together
with any interest of any person connected with him or her, an interest which is,
to his or her knowledge, a material interest, otherwise than by virtue of his or
her interests in shares, debentures or other securities of or otherwise in or
through us. If a question arises as to the materiality of a director's interest
or his or her entitlement to vote and the director does not voluntarily agree to
abstain from voting, that question will be referred to the chairman of the board
or, if the chairman also is interested, to a person appointed by the other
directors who is not interested. The ruling of the chairman or that other
person, as the case may be, will be final and conclusive. A director will not be
counted in the quorum at a meeting in relation to any resolution on which he or
she is prohibited from voting.
A director will be entitled to vote, and be counted in the quorum, on any
resolution concerning any of the following matters:
- the giving of any guarantee, security or indemnity in respect of money
lent or obligations incurred by him or her or by any other person at the
request of or for the benefit of us or any of our subsidiaries,
- the giving of any guarantee, security or indemnity to a third party in
respect of a debt or obligation of ours or any of our subsidiaries for
which he or she has assumed responsibility in whole or in part and whether
alone or jointly with others under a guarantee or indemnity or by the
giving of security,
- any proposal relating to us or any of our subsidiaries where we are
offering securities in which a director is or may be entitled to
participate as a holder of securities or in the underwriting or
sub-underwriting of which a director is to participate,
- any proposal relating to another company, provided that he or she and any
persons connected with him or her do not, to his or her knowledge, hold an
interest in shares, as defined under UK law, representing 1% or more of
either any class of the equity share capital, or the voting rights, in
such company,
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- any proposal relating to an arrangement for the benefit of our employees
or any of our subsidiaries that does not award him or her any privilege or
benefit not generally awarded to the employees to whom such arrangement
relates, and
- any proposal concerning insurance that we propose to maintain or purchase
for the benefit of directors or for the benefit of persons, including
directors.
Where proposals are under consideration concerning the appointment of two or
more directors to offices or employment with us or any company in which we are
interested, these proposals may be divided and considered separately and each of
these directors, if not prohibited from voting under the proviso of the fourth
clause above, will be entitled to vote and be counted in the quorum with respect
to each resolution except that concerning his or her own appointment.
BORROWING POWERS
The board of directors may exercise all powers to borrow money and incur
debt. The board shall restrict any borrowings in order to ensure that the
aggregate amount of undischarged debt will not at any time, without our prior
authorizing resolution, exceed a sum equal to twice the aggregate of the
adjusted capital and reserves, as calculated in accordance with article 90 of
our articles of association.
OTHER PROVISIONS RELATING TO DIRECTORS
Under the articles of association, directors are paid out of our funds for
their services as we may from time to time determine by ordinary resolution.
Directors currently are not required to be qualified by owning our shares. While
the Companies Act 1985 states that no director may be appointed after he reaches
the age of 70, our articles of association provide for the reappointment, after
retirement, of directors attaining the age of 70. This is permissible under the
Companies Act 1985.
ANNUAL GENERAL MEETINGS AND EXTRAORDINARY GENERAL MEETINGS
Shareholders' meetings may be either annual general meetings or
extraordinary general meetings. However, the following matters are ordinarily
transacted at an annual general meeting:
- sanctioning or declaring dividends,
- consideration of the accounts and balance sheet,
- ordinary reports of the board of directors and auditors and any other
documents required to be annexed to the balance sheet,
- as holders of ordinary shares vote for the election of one-third of the
members of the board of directors at every annual general meeting, the
appointment or election of directors in the place of those retiring by
rotation or otherwise,
- appointment or reappointment of, and determination of the remuneration of,
the auditors, and
- the renewal, limitation, extension, variation or grant of any authority of
or to the board, pursuant to the Companies Act 1985, to allot securities.
Business transacted at an extraordinary general meeting may also be
transacted at an annual general meeting.
We hold a general meeting as our annual general meeting within fifteen
months after the date of the preceding annual general meeting, at a place and
time determined by the board. The board may call an extraordinary general
meeting at any time and for any reason. The board must convene
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<PAGE>
an extraordinary general meeting if requested to do so by shareholders holding
not less than one-tenth of our issued share capital.
Three shareholders present in person and entitled to vote will constitute a
quorum for any general meeting. If a quorum for a meeting convened at the
request of shareholders is not present within fifteen minutes of the appointed
time, the meeting will be dissolved. In any other case, the general meeting will
be adjourned to the same day in the next week, at the same time and place, or to
a time and place that the chairman fixes. If at that rescheduled meeting a
quorum is not present within fifteen minutes from the time appointed for holding
the meeting, the shareholders present in person or by proxy will be a quorum.
The chairman or, in his absence, the deputy chairman or any other director
nominated by the board, will preside as chairman at every general meeting.
ORDINARY SHARES
Certificates representing ordinary shares are issued in registered form and,
subject to the terms of issue of those shares, are issued following allotment or
receipt of the form of transfer bearing the appropriate stamp duty by our
registrar, Lloyds Bank Registrars, the Causeway, Worthing, West Sussex BN99 6DA,
United Kingdom, telephone number +44-1903-502-541.
VOTING RIGHTS
Every holder of ordinary shares present in person at a meeting of
shareholders has one vote on a vote taken by a show of hands. On a poll, every
holder of ordinary shares who is present in person or by proxy has one vote for
every ordinary share of which he or she is the holder. Voting at any meeting of
shareholders is by a show of hands unless a poll is properly demanded. A poll
may be demanded by:
- the chairman of the meeting,
- at least three shareholders present in person or by proxy and entitled to
vote,
- any shareholder or shareholders present in person or by proxy representing
not less than one-tenth of the total voting rights of all shareholders
having the right to vote at the meeting, or
- any shareholder or shareholders present in person or by proxy holding
shares conferring a right to vote at the meeting being shares on which the
aggregate sum paid up is equal to not less than one-tenth of the total sum
paid up on all shares conferring that right.
DIVIDENDS
Holders of ordinary shares are entitled to receive dividends out of our
profits that are available by law for distribution, as we may declare by
ordinary resolution, subject to the terms of issue thereof. However, no
dividends may be declared in excess of an amount recommended by the board of
directors. The board may pay interim dividends to the shareholders as it deems
fit. We may invest or otherwise use all dividends left unclaimed for six months
after having been declared for our benefit, until claimed. All dividends
unclaimed for a period of twelve years after having been declared will be
forfeited and revert to us.
LIQUIDATION RIGHTS
In the event of our liquidation, after payment of all liabilities, our
remaining assets would be used to repay the holders of ordinary shares the
amount they paid for their ordinary shares. Any
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<PAGE>
balance would be divided among the holders of ordinary shares in proportion to
the nominal amount of the ordinary shares held by them.
OTHER PROVISIONS OF THE ARTICLES OF ASSOCIATION
Whenever our capital is divided into different classes of shares, the
special rights attached to any class may, unless otherwise provided by the terms
of the issue of the shares of that class, be varied or abrogated, either with
the written consent of the holders of three-fourths of the issued shares of the
class or with the sanction of an extraordinary resolution passed at a separate
meeting of these holders.
In the event that a shareholder or other person appearing to be interested
in ordinary shares fails to comply with a notice requiring him or her to provide
information with respect to their interest in voting shares pursuant to
section 212 of the Companies Act 1985, we may serve that shareholder with a
notice of default. After service of a default notice, that shareholder shall not
be entitled to attend or vote at any general meeting or at a separate meeting of
holders of a class of shares or on a poll until he or she has complied in full
with our information request.
If the shares described in the default notice represent at least one-fourth
of 1% in nominal value of the issued ordinary shares, then the default notice
may additionally direct that in respect of those shares:
- we will not issue shares or pay dividends, and
- we will not register transfers of shares unless the shareholder attaches
to that transfer, when presented for registration, a certificate to the
effect that after due and careful inquiry, the shareholder is satisfied
that no person in default is interested in any of the ordinary shares
which are being transferred or the transfer is an approved transfer, as
defined in our articles of association.
No provision of our articles of association expressly governs the ordinary
share ownership threshold above which shareholder ownership must be disclosed.
Under the Companies Act 1985, any person who acquires, either alone or, in
specified circumstances, with others:
- a material interest in our voting share capital equal to or in excess of
3%, or
- a non-material interest equal to or in excess of 10%,
comes under an obligation to disclose prescribed particulars to us in respect of
those ordinary shares. A disclosure obligation also arises where a person's
notifiable interests fall below the notifiable percentage, or where, above that
level, the percentage of our voting share capital in which a person has a
notifiable interest increases or decreases.
LIMITATIONS AFFECTING HOLDERS OF ORDINARY SHARES OR ADSS
Under English law and our memorandum and articles of association, persons
who are neither UK residents nor UK nationals may freely hold, vote and transfer
ordinary shares in the same manner as UK residents or nationals.
With respect to the items discussed above, applicable UK law is not
materially different from applicable US law.
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<PAGE>
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
AMERICAN DEPOSITARY SHARES
The Bank of New York will issue the ADSs. The ownership interest in each
ordinary share will be represented by one ADS. The ordinary shares or the right
to receive ordinary shares will be deposited by us with a custodian, the London
office of The Bank of New York. Each ADS will also represent securities, cash or
other property deposited with The Bank of New York but not distributed to ADS
holders. The Bank of New York's Corporate Trust office is located at 101 Barclay
Street, New York, N.Y. 10286. Its principal executive office is located at
One Wall Street, New York, N.Y. 10286.
You may hold ADSs either directly or indirectly through your broker or
another financial institution. If you hold ADSs directly, you are an ADS holder.
This description assumes you hold your ADSs directly. If you hold the ADSs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the rights of ADS holders described in this section. You
should speak to your broker or financial institution for further information
about those procedures.
The Bank of New York will actually hold the ordinary shares. You must rely
on it to exercise the rights of a shareholder. The obligations of The Bank of
New York are set out in an agreement among us, The Bank of New York and you, as
an ADS holder. That agreement and the ADSs generally are governed by New York
law.
The following is a summary of the agreement. Because it is a summary, it
does not contain all the information that may be important to you. For more
complete information, you should read the entire agreement and the ADR.
Directions on how to obtain copies of these are provided in the section entitled
"Where You Can Find More Information".
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on ordinary shares or other deposited
securities after deducting its fees and expenses. You will receive these
distributions in proportion to the number of shares your ADSs represent.
CASH. The Bank of New York will convert any cash dividend or other cash
distribution we pay on the shares into US dollars, if it can do so on a
reasonable basis and can transfer those dollars to the US. If that is not
possible or if approval of any government is needed and cannot be obtained, the
agreement allows The Bank of New York to distribute sterling to those ADS
holders to whom it is possible to do so. The Bank of New York will hold the
sterling it cannot convert for the account of the ADS holders who have not been
paid. It will not invest the sterling and it will not be liable for the
interest.
Before making a distribution, any withholding taxes that must be paid under
applicable law will be deducted. See "Tax Considerations" for more information.
The Bank of New York will distribute only whole US dollars and cents and will
round fractional cents to the nearest whole cent. IF THE EXCHANGE RATES
FLUCTUATE AT A TIME WHEN THE BANK OF NEW YORK CANNOT CONVERT THE STERLING, YOU
MAY LOSE SOME OR ALL OF THE VALUE OF THE DISTRIBUTION.
ORDINARY SHARES. The Bank of New York may distribute new ADSs representing
any ordinary shares we may distribute as a dividend or free distribution, if we
furnish it promptly with satisfactory evidence that it is legal for it to do so.
The Bank of New York will only distribute whole ADSs. It will sell ordinary
shares which would require it to use a fractional ADS and distribute the net
proceeds in the same way it does cash. If The Bank of New York does not
distribute additional ADSs, each ADS will also represent the new ordinary
shares.
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RIGHTS TO RECEIVE ADDITIONAL ORDINARY SHARES. If we offer holders of our
ordinary shares any rights to subscribe for additional shares or any other
rights, The Bank of New York may, after consultation with us, make these rights
available to you. We first must instruct The Bank of New York to do so and
furnish it with satisfactory evidence that it is legal for it to do so. If we
fail to furnish this evidence or to give these instructions, and The Bank of New
York decides it is practical to sell the rights, The Bank of New York will sell
the rights and distribute the proceeds in the same way it does cash. The Bank of
New York may allow rights that are not distributed or sold to lapse. In that
case, you would receive no value for them.
If The Bank of New York makes rights available to you, upon instruction from
you, it will exercise the rights and purchase the shares on your behalf. The
Bank of New York will then deposit the ordinary shares and issue ADSs to you. It
will only exercise rights if you pay it the exercise price and any other charges
the rights require you to pay.
The US securities laws may restrict the sale, deposit, cancellation and
transfer of the ADSs issued after the exercise of rights. For example, you may
not be able to trade the ADSs freely in the United States. In this case, The
Bank of New York may issue the ADSs under a separate restricted deposit
agreement which will contain the same provisions as the agreement except for the
changes needed to put the restrictions in place.
OTHER DISTRIBUTIONS. The Bank of New York will send to you anything else we
distribute on deposited securities by any means it thinks is legal, fair and
practical. If it cannot make the distribution in that way, The Bank of New York
may either sell what we distributed and distribute the net proceeds in the same
way it does cash or it may decide to hold what we distributed, in which case the
ADSs will also represent the newly distributed property.
The Bank of New York is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. We have no
obligation to register ADSs, ordinary shares, rights or other securities under
the Securities Act. We also have no obligation to take any other action to
permit the distribution of ADSs, ordinary shares, rights or anything else to ADS
holders. This means that you may not receive the distribution we make on our
ordinary shares or any value for them if it is illegal or impractical for us to
make them available to you.
DEPOSIT, WITHDRAWAL AND CANCELLATION
The Bank of New York will issue ADSs if you or your broker deposit ordinary
shares or evidence of rights to receive ordinary shares with the custodian. Upon
payment of its fees and expenses and of any taxes or charges, such as stamp
taxes or stock transfer taxes or fees, The Bank of New York will register the
appropriate number of ADSs in the names you request and will deliver the ADSs at
its Corporate Trust office to the persons you request.
You may turn in your ADSs at The Bank of New York's Corporate Trust office.
Upon payment of its fees and expenses and of any taxes or charges, such as stamp
taxes or stock transfer taxes or fees, The Bank of New York will deliver the
underlying ordinary shares to an account designated by you and any other
deposited securities underlying the ADSs at the office of the custodian. Or, at
your request, risk and expense, The Bank of New York will deliver the deposited
securities at its Corporate Trust office.
VOTING RIGHTS
You may instruct The Bank of New York to vote the ordinary shares underlying
your ADSs only if we ask The Bank of New York to ask for your instructions.
Otherwise, you will not be able to exercise your right to vote unless you
withdraw the ordinary shares. However, you may not know about the meeting long
enough in advance to withdraw the ordinary shares.
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If we ask for your instructions, The Bank of New York will notify you of the
upcoming vote and arrange to deliver our voting materials to you. The materials
will describe the matters to be voted on and explain how you, on a certain date,
may instruct The Bank of New York to vote the ordinary shares or other deposited
securities underlying your ADSs as you direct. For instructions to be valid, The
Bank of New York must receive them on or before the date specified. The Bank of
New York will try, as far as practical, subject to English law and the
provisions of our articles of association, to vote or to have its agents vote
the ordinary shares or other deposited securities as you instruct. The Bank of
New York will only vote or attempt to vote as you instruct. However, if The Bank
of New York does not receive your voting instructions, it will give a proxy to
vote your ordinary shares to our designated representative.
We cannot assure you that you will receive the voting materials in time to
ensure that you can instruct The Bank of New York to vote your shares. In
addition, The Bank of New York and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote
and there may be nothing you can do if your ordinary shares are not voted as you
requested.
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADS HOLDERS MUST PAY: FOR:
--------------------- ---------------------------------------------
<S> <C>
$5.00 (or less) per 100 ADSs................. Each issue of an ADS, including as a result
of a distribution of ordinary shares or
rights or other property
Each cancellation of an ADS, including if the
agreement terminates
$.02 (or less) per ADS....................... Any cash payment, except for distributions of
cash dividends
Registration or Transfer Fees................ Transfer and registration of ordinary shares
on the share register of the foreign
registrar from your name to the name of The
Bank of New York or its agent when you
deposit or withdraw ordinary shares
Expenses of The Bank of New York............. Conversion of sterling to US dollars
Cable, telex and facsimile transmission
expenses
Taxes and other governmental charges The Bank
of New York or the custodian have to pay on
any ADS or ordinary share underlying an ADS,
for example, stock transfer taxes, stamp
duty, stamp duty reserve tax or withholding
taxes........................................ As necessary
</TABLE>
PAYMENT OF TAXES
You will be responsible for any taxes or other governmental charges payable
on your ADSs or on the deposited securities underlying your ADSs. The Bank of
New York may refuse to transfer your ADSs or allow you to withdraw the deposited
securities underlying your ADSs until such taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities
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underlying your ADSs to pay any taxes owed and you will remain liable for any
deficiency. If it sells deposited securities, it will, if appropriate, reduce
the number of ADSs to reflect the sale and pay to you any proceeds, or send to
you any property, remaining after it has paid the taxes.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
If we change the nominal or par value of our ordinary shares; reclassify,
split up or consolidate any of the deposited securities; distribute securities
on the ordinary shares that are not distributed to you; or recapitalize,
reorganize, merge, liquidate, sell all or substantially all of our assets, or
take any similar action, then:
- the cash, ordinary shares or other securities received by The Bank of New
York will become deposited securities and each ADS will automatically
represent its equal share of the new deposited securities; and
- The Bank of New York may, and will if we ask it to, distribute some or all
of the cash, ordinary shares or other securities it received and may also
issue new ADSs or ask you to surrender your outstanding ADSs in exchange
for new ADSs, identifying the new deposited securities.
AMENDMENT AND TERMINATION
We may agree with The Bank of New York to amend the agreement and the ADSs
for any reason without your consent. If the amendment adds or increases fees or
charges, except for taxes and other governmental charges or registration fees,
cable, telex or facsimile transmission costs, delivery costs or other such
expenses, or prejudices an important right of ADS holders, it will only become
effective 30 days after The Bank of New York notifies you of the amendment. At
the time an amendment becomes effective, you are considered, by continuing to
hold your ADSs, to agree to the amendment and to be bound by the ADSs, and the
agreement is amended.
The Bank of New York will terminate the agreement if we ask it to do so. The
Bank of New York may also terminate the agreement if it has informed us that it
would like to resign and we have not appointed a new depositary bank within
90 days. In both cases, The Bank of New York must notify you at least 30 days
before termination.
After termination, The Bank of New York and its agents will be required to
do only the following under the agreement:
- collect distributions on the deposited securities and deliver ordinary
shares and other deposited securities upon cancellation of ADSs.
At any time after the expiration of one year from the date of termination,
The Bank of New York may sell any remaining deposited securities by public or
private sale. After that, The Bank of New York will hold the proceeds of the
sale, as well as any other cash it is holding under the agreement for the pro
rata benefit of the ADS holders that have not surrendered their ADSs. It will
not invest the money and will have no liability for interest. The Bank of New
York's only obligation will be to account for the proceeds of the sale and other
cash. After termination our only obligations will be with respect to
indemnification and to pay certain amounts to The Bank of New York.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADS HOLDERS
The agreement expressly limits our obligations and the obligations of The
Bank of New York, and it limits our liability and the liability of The Bank of
New York. We and The Bank of New York:
- are only obligated to take the actions specified in the agreement without
negligence or bad faith,
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- are not liable if either is prevented or delayed by law or circumstances
beyond our control from performing our obligations under the agreement,
- are not liable if either exercises discretion permitted under the
agreement,
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADSs or the agreement on your behalf or on behalf of any
other party, and
- may rely upon any documents they believe in good faith to be genuine and
to have been signed or presented by the proper party.
In the agreement, we and The Bank of New York agree to indemnify each other
under specified circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register transfer of an ADS, make
a distribution on an ADS, or withdrawal of ordinary shares, The Bank of New York
may require:
- payment of stock transfer or other taxes or other governmental charges and
transfer or registration fees charged by third parties for the transfer of
any shares or other deposited securities,
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary, and
- compliance with regulations it may establish, from time to time,
consistent with the agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer, or register transfers
of ADSs generally when the books of The Bank of New York or we are closed, or at
any time if The Bank of New York or we think it advisable to do so.
You have the right to cancel your ADSs and withdraw the underlying ordinary
shares at any time except:
- when temporary delays arise because The Bank of New York or we have closed
transfer books or the deposit of shares in connection with voting at a
shareholders' meeting, or paying a dividend on the ordinary shares,
- when you or other ADS holders seeking to withdraw ordinary shares owe
money to pay fees, taxes and similar charges, or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADSs or to the withdrawal
of ordinary shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
agreement.
PRE-RELEASE OF ADSS
In specified circumstances, subject to the provisions of the agreement, The
Bank of New York may issue ADSs before deposit of the underlying ordinary
shares. This is called a pre-release of the ADSs. The Bank of New York also may
deliver ordinary shares upon cancellation of pre-released ADSs even if the ADSs
are canceled before the pre-release transaction has been closed. A pre-release
is closed as soon as the underlying ordinary shares are delivered to The Bank of
New
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York. The Bank of New York may receive ADSs instead of ordinary shares to close
a pre-release. The Bank of New York may pre-release ADSs only under the
following conditions:
- before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to The Bank of New York in
writing that it or its customer owns the ordinary shares or ADSs to be
deposited,
- the pre-release must be fully collateralized with cash or other collateral
that The Bank of New York considers appropriate, and
- The Bank of New York must be able to close out the pre-release on not more
than five business days' notice.
In addition, The Bank of New York will limit the number of ADSs that may be
outstanding at any time as a result of pre-release, although The Bank of New
York may disregard the limit from time to time, if, in its judgment, it is
appropriate to do so.
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TAX CONSIDERATIONS
The following is a discussion of the material US federal income tax
considerations and UK tax considerations arising from the US rights offering and
from the acquisition, ownership and disposition of ordinary shares and ADSs by a
US holder. A US holder is:
- an individual citizen or resident of the US,
- a corporation created or organized in or under the laws of the US or any
of its political subdivisions, or
- an estate or trust the income of which is subject to US federal income
taxation regardless of its source.
This discussion deals only with share rights, ADS rights, ordinary shares
and ADSs that are held as capital assets by a US holder, and does not address
tax considerations applicable to US holders that may be subject to special tax
rules, such as:
- dealers or traders in securities or currencies,
- financial institutions or other US holders that treat income in respect of
the share rights, ADS rights, ordinary shares or ADSs as financial
services income,
- insurance companies,
- tax-exempt entities,
- US holders that hold the share rights, ADS rights, ordinary shares or ADSs
as a part of a straddle or conversion transaction or other arrangement
involving more than one position,
- US holders that own, or are deemed for US tax purposes to own, 10% or more
of the total combined voting power of all classes of our voting stock,
- US holders that have a principal place of business or "tax home" outside
the US, or
- US holders whose "functional currency" is not the US dollar.
For US federal income tax purposes, holders of ADSs will be treated as the
owners of the ordinary shares represented by those ADSs.
The discussion below is based upon current UK law and the provisions of the
US Internal Revenue Code of 1986 and regulations, rulings and judicial decisions
as of the date of this prospectus; any such authority may be repealed, revoked
or modified, perhaps with retroactive effect, so as to result in tax
consequences different from those discussed below. This discussion is also based
on the current Income Tax Treaty between the UK and the US. UK and US tax
authorities have announced the commencement of discussions to update the Income
Tax Treaty. There can be no assurance, however, as to whether these discussions
will come to fruition or, if so, as to the impact of any resulting changes in
the Income Tax Treaty on the summary tax consequences set forth below. In
addition, the following discussion assumes that The Bank of New York will
perform its obligations as depositary in accordance with the terms of the
depositary agreement and any related agreements.
BECAUSE US AND UK TAX CONSEQUENCES MAY DIFFER FROM ONE HOLDER TO THE NEXT,
THE DISCUSSION SET OUT BELOW DOES NOT PURPORT TO DESCRIBE ALL OF THE TAX
CONSIDERATIONS THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR SITUATION.
ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE US
FEDERAL, STATE AND LOCAL, UK AND OTHER, INCLUDING FOREIGN, TAX CONSEQUENCES OF
THE US RIGHTS OFFERING AND OF INVESTING IN THE ORDINARY SHARES OR ADSS. THE
STATEMENTS OF US AND UK TAX LAW SET OUT BELOW ARE BASED ON THE LAWS AND
INTERPRETATIONS IN
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FORCE AS OF THE DATE OF THIS PROSPECTUS, AND ARE SUBJECT TO ANY CHANGES
OCCURRING AFTER THAT DATE.
THE US RIGHTS OFFERING
US TAXATION OF THE US RIGHTS OFFERING
DISTRIBUTION OF SHARE RIGHTS OR ADS RIGHTS. A US holder of ordinary shares
or ADSs will not be required to include any amount in income for US federal
income tax purposes as a result of the distribution of share rights or ADS
rights from Pearson.
In a tax-free distribution of rights, if the fair market value of the share
rights or ADS rights on the date of distribution is less than 15% of the fair
market value of the ordinary shares or ADSs with respect to which the share
right or ADS right was distributed, then the tax basis of the share right or ADS
right will be zero, unless the US holder elects to allocate its tax basis in the
underlying ordinary shares or the underlying ADSs, as the case may be, between
the ordinary shares or ADSs and the share right or ADS right in proportion to
the relative fair market value of each on the date of distribution of the share
right or ADS right. Any such election must be made in respect of all share
rights or ADS rights distributed to the US holder, must be made in the original
US federal income tax return filed by the US holder for the year in which the US
holder receives the share rights or ADS rights, and once made, is irrevocable.
If, on the date of distribution, the fair market value of the share right or ADS
right is 15% or more of the fair market value of the ordinary shares or ADSs
with respect to which the share right or ADS right was distributed, then there
is no election available and a US holder must allocate tax basis between the
share right or ADS right and the underlying ordinary shares or underlying ADSs
in proportion to their respective fair market values.
As of the record date for the rights offering, the value of the share rights
and ADS rights was approximately 13.7% of the ordinary shares or ADSs with
respect to which they were distributed. We calculated this amount by dividing
the excess of the L20.10 per share market price on the record date over the L10
per share subscription price for three share rights by the market price on that
date of eleven ordinary shares. The value on the distribution date cannot be
determined until that date.
In a tax-free distribution of rights, the holding period of a share right or
an ADS right in the hands of a US holder will include the holding period of the
underlying ordinary shares or the underlying ADSs, as the case may be, with
respect to which the share right or ADS right was distributed.
SALE OR EXCHANGE OF SHARE RIGHTS OR ADS RIGHTS. On the sale or exchange of
a share right or an ADS right, a US holder will recognize gain or loss in an
amount equal to the difference between the amount realized upon the sale or
exchange and the tax basis, if any, of the share right or the ADS right. Any
gain or loss from the sale or exchange will be a capital gain or loss, and will
be a long-term capital gain or loss if the combined holding period for the share
right or ADS right and the ordinary share or ADS with respect to which the share
right or ADS right was distributed is more than one year. Any US holder
receiving cash with respect to an unexercised share right or ADS right will be
treated either as if it sold the share right or ADS right for the cash received
or as if it exercised the share right or ADS right and then sold the ordinary
share or ADS for the cash received plus the issue price of the ordinary share or
ADS.
EXPIRATION OF SHARE RIGHTS OR ADS RIGHTS. If the share rights or ADS rights
lapse, then no basis will be allocated to the rights and no loss will be
recognized on their lapse. Any US holder that receives cash with respect to
unexercised share rights or ADS rights will not be treated as though its share
rights or ADS rights have lapsed for this purpose.
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EXERCISE OF SHARE RIGHTS OR ADS RIGHTS. A US holder will not recognize gain
or loss upon exercise of a share right or an ADS right.
TAX BASIS OF ORDINARY SHARES OR ADSS. The tax basis of each ordinary share
or ADS acquired upon exercise of a share right or an ADS right will equal the
sum of the issue price of the ordinary share or ADS and the tax basis, if any,
for the share right or the ADS right exercised. The holding period of any
ordinary share or ADS acquired through the exercise of a share right or an ADS
right will begin with and include the date of exercise.
UK TAXATION OF THE US RIGHTS OFFERING
UK CAPITAL GAINS TAX. A US holder who is not resident or, in the case of an
individual, ordinarily resident in the United Kingdom will not normally be
liable for UK taxation on capital gains realized on the disposal of his share
rights or ADS rights unless the US holder carries on a trade in the United
Kingdom through a branch or agency and such share rights or ADS rights are or
have been used, held or acquired for the purposes of such trade, branch or
agency. The distribution of share rights and ADS rights will not be treated as a
dividend for purposes of UK taxation.
UK ESTATE AND GIFT TAX. The same rules generally apply as set forth below
with respect to ordinary shares or ADSs.
UK STAMP DUTY AND STAMP DUTY RESERVE TAX. The general rules with respect to
ordinary shares and ADSs are set out below. Stamp duty reserve tax at a rate of
1.5% of the actual consideration paid for ordinary shares will be payable on the
issue of ordinary shares attributable to the exercise of ADS rights. Each holder
of an ADS right must pay this amount to the ADS subscription agent with the ADS
subscription price.
OWNERSHIP OF ORDINARY SHARES OR ADSS
UK INCOME TAXATION OF DISTRIBUTIONS
Under the Income Tax Treaty, subject to certain exceptions, a US holder who
is a resident of the US (and is not a resident of the UK) for purposes of the
Income Tax Treaty is entitled to receive, in addition to any dividend that we
pay, a payment from the Inland Revenue in respect of such dividend equal to the
tax credit to which an individual resident in the UK for tax purposes would have
been entitled had he received the dividend (which is currently equal to
one-ninth of the dividend received), reduced by a UK withholding tax equal to an
amount not exceeding 15% of the sum of the dividend paid and the UK tax credit
payment. At current rates the withholding tax entirely eliminates the tax credit
payment but no withholding in excess of the tax credit payment is imposed upon
the US holder. Thus, for example, a US holder that receives a $100.00 dividend
also will be treated as receiving from the Inland Revenue a tax credit payment
of $11.11 (one-ninth of the dividend received), but the entire $11.11 payment
will be eliminated by UK withholding tax, resulting in a net $100.00
distribution to the US holder.
US INCOME TAXATION OF DISTRIBUTIONS
Distributions that we make with respect to the ordinary shares or ADSs,
other than distributions in liquidation and distributions in redemption of stock
that are treated as exchanges, will be taxed to US holders as ordinary dividend
income to the extent that the distributions do not exceed Pearson's current and
accumulated earnings and profits. The amount of any distribution will equal the
sum of the cash distribution and its associated UK tax credit payment; thus, as
described above under "--UK Income Taxation of Distributions", the recipient of
a $100.00 cash distribution will be deemed to have received a total distribution
of $111.11. Distributions, if any, in excess of our current and accumulated
earnings and profits will constitute a nontaxable return of capital to a US
holder and
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will be applied against and reduce the US holder's tax basis in its ordinary
shares or ADSs. To the extent that these distributions exceed the tax basis of
the US holder in its ordinary shares or ADSs, the excess generally will be
treated as capital gain.
Dividends that we pay will not be eligible for the dividends received
deduction generally allowed to US corporations under Section 243 of the Code.
In computing its US federal income tax liability, a US holder generally may
elect for each taxable year to claim a deduction or, subject to the limitations
on foreign tax credits generally, a US foreign tax credit for foreign income
taxes withheld from any distributions paid on the ordinary shares or ADSs. The
Internal Revenue Service has confirmed in a recent revenue procedure that, in
the case of US holders and subject to certain limitations, a foreign tax credit
may be claimed for the amount of UK withholding taxes deemed to be imposed under
the Income Tax Treaty. As discussed above (see "--UK Income Taxation of
Distributions"), the amount of UK withholding tax deemed to be imposed is equal
to one-ninth of the associated cash distribution, or $11.11 on a $100.00 cash
distribution. To qualify for this credit, a US holder must make an election on
Form 8833 (Treaty-Based Return Position Disclosure), which must be filed with
its tax return for the relevant taxable year, in addition to any other filings
that may be required. For US foreign tax credit purposes, dividends that we pay
generally will be treated as foreign-source income and as passive income,
subject to the separate foreign tax credit limitation for passive income. The
availability of foreign tax credits depends on your particular circumstances.
In the case of distributions in sterling, the amount of the distributions
generally will equal the US dollar value of the sterling distributed, determined
by reference to the spot currency exchange rate on the date of receipt of the
distribution by the US holder in the case of shares or by The Bank of New York
in the case of ADSs, regardless of whether the US holder reports income on a
cash basis or an accrual basis. The US holder will realize separate foreign
currency gain or loss only to the extent that this gain or loss arises on the
actual disposition of sterling received. For US holders claiming tax credits on
a cash basis, taxes withheld from the distribution are translated into US
dollars at the spot rate on the date of the distribution; for US holders
claiming tax credits on an accrual basis, taxes withheld from the distribution
are translated into US dollars at the average rate for the taxable year.
UK TAXATION OF CAPITAL GAINS
Under the Income Tax Treaty, each country generally may tax capital gains in
accordance with the provisions of its domestic law. Under present UK law, a US
holder that is not a resident, and, in the case of an individual, not ordinarily
resident, in the UK for UK tax purposes and who does not carry on a trade,
profession or vocation in the UK through a branch or agency to which ordinary
shares or ADSs are attributable will not be liable for UK taxation on capital
gains or eligible for relief for allowable losses, realized on the sale or other
disposal (including redemption) of these ordinary shares or ADSs, subject to
exceptions applicable to persons who are temporarily non-resident in the UK.
US INCOME TAXATION OF CAPITAL GAINS
Upon a sale or exchange of ordinary shares or ADSs to a person other than
Pearson, a US holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale or exchange and the US
holder's adjusted tax basis in the ordinary shares or ADSs. Any gain or loss
recognized will be capital gain or loss and will be long-term capital gain or
loss if the US holder has held the ordinary shares or ADSs for more than one
year.
Gain or loss realized by a US holder on the sale or exchange of ordinary
shares or ADSs generally will be treated as US-source gain or loss for US
foreign tax credit purposes.
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ESTATE AND GIFT TAX
The current Estate and Gift Tax Convention between the US and the UK
generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift
Tax) the transfer of ordinary shares or of ADSs where the transferor is
domiciled in the US, for the purposes of the Convention. This relief will not
apply if the ordinary shares or ADSs are part of the business property of an
individual's permanent establishment in the UK or pertain to the fixed base in
the UK of a person providing independent personal services. If no relief is
given under the Convention, Inheritance Tax may be charged on the amount by
which the value of the transferor's estate is reduced as a result of any
transfer made by way of gift or other gratuitous transfer by an individual, in
general within seven years of death, or on the death of an individual. In the
unusual case where ordinary shares or ADSs are subject to both UK Inheritance
Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in
the UK to be credited against tax payable in the US or for tax paid in the US to
be credited against tax payable in the UK based on priority rules set forth in
the Convention.
STAMP DUTY
No stamp duty or stamp duty reserve tax (SDRT) will be payable in the UK on
the purchase or transfer of an ADS, provided that the ADS, and any separate
instrument or written agreement of transfer, remain at all times outside the UK
and that the instrument or written agreement of transfer is not executed in the
UK. Stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the
amount or value of the consideration or, in some circumstances, the value of the
ordinary shares, where ordinary shares are issued or transferred to a person
whose business is or includes issuing depositary receipts, or to a nominee or
agent for such a person.
A transfer for value of the underlying ordinary shares will generally be
subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount
or value of the consideration. A transfer of ordinary shares from a nominee to
its beneficial owner, including the transfer of underlying ordinary shares from
the Depositary to an ADS holder, under which no beneficial interest passes is
subject to stamp duty at the fixed rate of L5.00 per instrument of transfer.
CLOSE COMPANY STATUS
We believe that the close company provisions of the UK Income and
Corporation Taxes Act 1988 do not apply to us.
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PLAN OF DISTRIBUTION
We and the underwriters named in the table below have entered into a standby
underwriting agreement, as amended by a supplemental agreement, with respect to
the rights offering both outside and inside the US. Pursuant to the terms of
this underwriting agreement, if you do not exercise your share rights or ADS
rights by the end of the subscription period, the underwriters have agreed to
endeavor to procure subscribers for the new ordinary shares underlying the
unsubscribed rights at a price in excess of the subscription price and expenses
of sale. In the event the underwriters are unable to procure subscribers for the
unsubscribed ordinary shares on those terms, they have severally agreed, subject
to certain conditions, to subscribe for up to 150 million of the unsubscribed
ordinary shares at the L10 per share subscription price. With respect to this
purchase, the underwriters will subscribe for the percentage of those
underwritten ordinary shares indicated in the following table.
<TABLE>
<CAPTION>
PERCENTAGE OF
UNSUBSCRIBED
UNDERWRITER SHARES
----------- -------------
<S> <C>
WITH RESPECT TO THE FIRST 82,000,000 UNDERWRITTEN ORDINARY
SHARES
Goldman Sachs International................................. 72.222%
Cazenove & Co. ............................................. 27.778%
WITH RESPECT TO THE REMAINING UNDERWRITTEN ORDINARY SHARES
Goldman Sachs International................................. 50%
Cazenove & Co. ............................................. 50%
</TABLE>
The underwriters' obligations to subscribe for any unsubscribed ordinary
shares will be reduced by the number of ordinary shares that are taken up during
the subscription period or sold after the subscription period ends as a result
of the underwriters' efforts to procure subscribers for those ordinary shares.
In the event that the underwriters, acting solely as our agent, procure
subscribers on your behalf, the underwriters or their agents, including other
broker-dealers, are entitled to receive and retain any commissions or other fees
paid in connection with the resulting sales. Any proceeds in excess of these
expenses and the subscription price, which will be paid to us, will be paid pro
rata to the unexercising holders.
We have agreed to pay the underwriters a commission of L7.5 million, which
represents 0.5% of the aggregate subscription price of the underwritten ordinary
shares, which is L1.5 billion. We will also pay the underwriters an additional
commission of 0.1%, or L1.5 million, per seven-day period, or any part of that
period, after August 30, 2000 until the date that is the earliest of:
- the date on which the sub-underwriters learn the number of shares that
they will sub-underwrite,
- the third business day in London after the end of the subscription period,
or
- the date on which the underwriters' obligations under the underwriting
agreement cease.
The underwriters will pay, by reallocating a portion of their own
commission, any sub-underwriters 0.4% of the aggregate subscription price of
ordinary shares that each sub-underwriter sub-underwrites. The underwriters will
also pay, by reallocating a portion of their
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own commission, to the sub-underwriters an additional commission of 0.1%, per
seven-day period, or any part of that period, after August 30, 2000 until the
date that is the earliest of:
- the date on which the sub-underwriters learn the number of shares that
they will sub-underwrite,
- the third business day in London after the end of the subscription period,
or
- the date on which the underwriters' obligations under the underwriting
agreement cease.
In the event that the underwriters or sub-underwriters are required to pay
us the subscription price and take up the unsubscribed ordinary shares, any
resale of the unsubscribed ordinary shares by the underwriters or
sub-underwriters will be for their own account and not on behalf of the
unexercising holders. The proceeds from any resale will belong to them. These
proceeds could be deemed underwriting compensation.
The underwriters may distribute the ordinary shares in the US in one or more
of the following types of transactions:
- transactions, which may include block transactions, on the New York Stock
Exchange,
- exchange distributions and/or secondary distributions in accordance with
the rules of the New York Stock Exchange,
- over-the-counter market transactions,
- negotiated transactions, or
- a combination of any of these transactions.
These transactions may be effected by selling the ordinary shares to or
through the US selling agents of the underwriters or other dealers, at:
- fixed prices, which may be changed,
- prevailing market prices at the time of the sale,
- prices related to prevailing market prices, or
- negotiated prices.
Dealers that engage in these transactions may receive compensation in the
form of discounts, concessions or commissions from the underwriters,
sub-underwriters or subsequent purchasers of the ordinary shares.
Other terms relating to the distribution of the share rights and ADS rights,
as well as the distribution of new ordinary shares and new ADSs, are described
under "The US Rights Offering" above.
We have been advised by the underwriters that they expect to make offers and
sales of the unsubscribed ordinary shares outside of the US and inside the US
through their respective selling agents. This prospectus may be used in
connection with the offers and sales, or resales, to persons located in the US.
The underwriters may distribute the unsubscribed shares in the form of ordinary
shares or ADSs. A deposit of ordinary shares will be necessary to distribute
ADSs, which will cause the imposition of a 1.5% UK tax on the issue price of the
ordinary shares.
In connection with the offering, the underwriters may purchase and sell
ordinary shares, ADSs, share rights or ADS rights in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of any of these securities than they could be
101
<PAGE>
required to purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of any of these securities made by the
underwriters in the open market prior to the completion of the offering.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
ordinary shares, ADSs, share rights or ADS rights and may maintain or otherwise
affect the market price of those securities. As a result, the price of those
securities may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued at any time.
These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
We will apply to list the ADRs representing the ADSs on the New York Stock
Exchange under the symbol "PSO". We do not intend to list the ADS rights, but
you may trade them in the over-the-counter market. Our ordinary shares are
listed on the London Stock Exchange under the symbol "PSON". The share rights
will trade on the London Stock Exchange.
The underwriters, their US selling agents and their respective affiliates
may perform investment banking services for us from time to time. Affiliates of
the underwriters have advised us in connection with the NCS acquisition.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of ordinary shares that may be offered.
We estimate that our share of the total expenses, excluding the commissions
paid to the underwriters or sub-underwriters, in connection with the offering
will be approximately L6 million or $9 million.
We have agreed to indemnify the underwriters and their US selling agents
against liabilities under the Securities Act.
102
<PAGE>
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are a public company with limited liability incorporated under the laws
of England and Wales. Most of our senior management and some of the experts
named in this prospectus are not residents of the US. A substantial portion of
our assets and all or a substantial portion of the assets of these named persons
are or may be located outside the US. As a result, it may not be possible for
investors to effect service of process within the US upon us or these persons or
to enforce against us or them judgments obtained in US courts. We have been
advised by our legal advisors, Freshfields Bruckhaus Deringer, that there is
substantial doubt as to the enforcement in England, in original actions or in
actions for enforcement of judgments of US courts, of liabilities predicated
upon US federal securities laws, including civil liabilities under those laws.
We have expressly submitted to the jurisdiction of the US federal and New
York state courts sitting in The City of New York for the purpose of any suit,
action or proceeding arising out of this offering, and we have appointed
Pearson Inc., New York, New York, to accept service of process.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the US Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act with respect to the securities
offered in this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information in the registration
statement. Portions of the registration statement contain exhibits and schedules
which have been omitted from this prospectus as permitted by the rules and
regulations of the SEC. For further information about us and our ordinary shares
offered in this prospectus, we refer you to the registration statement and to
its exhibits and schedules. You may inspect the registration statement,
including all its exhibits and schedules, without charge at the principal office
of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC in Chicago, Illinois and New York, New York. You may
obtain copies of this material from the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, we have applied for listing on the New York Stock Exchange. You may
inspect reports and other information about us at the office of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
Upon completion of this offering, we will be subject to the informational
requirements of some US federal securities laws and, therefore, we will be
required or have agreed to file periodic reports and other information with the
SEC, except as described below. As a foreign private issuer, we will be exempt
from the rules under the Exchange Act prescribing the furnishing and content of
proxy statements. Additionally, our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, under the
Exchange Act, we are not required to publish financial statements as frequently,
as promptly or containing the same information as US companies.
103
<PAGE>
VALIDITY OF SECURITIES
The validity of the ordinary shares represented by the ADSs being registered
hereunder will be passed upon by Freshfields Bruckhaus Deringer, our English
counsel. The validity of the ADSs will be passed upon for us by Morgan, Lewis &
Bockius LLP, and for the underwriters by Sullivan & Cromwell. Morgan, Lewis &
Bockius LLP and Sullivan & Cromwell may rely upon Freshfields Bruckhaus Deringer
with respect to matters of English law.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers, independent chartered accountants, given on the
authority of said firm as experts in auditing and accounting.
The Simon & Schuster (Excluding Consumer) carve-out financial statements as
of December 31, 1997, 1996 and 1995 and for each of the three years in the
period ended December 31, 1997 included in this prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
UK PROSPECTUS
A copy of the UK prospectus relating to Pearson in accordance with the
listing rules made under Section 142 of the UK Financial Services Act 1986 in
connection with the offering of new shares and their admission to the Official
List of the UK Listing Authority has been delivered to the Registrar of
Companies in England and Wales for registration in accordance with Section 149
of such Act and is available for inspection at our registered office at
3 Burlington Gardens, London W1X 1LE, England. The contents of the referenced UK
prospectus do not form part of, nor are they incorporated into, this prospectus.
104
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PEARSON PLC
Report of Independent Accountants........................... F-2
Consolidated Profit and Loss Account........................ F-3
Consolidated Balance Sheet as at December 31, 1999.......... F-5
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1999......................................... F-6
Statement of Total Recognized Gains and Losses for the Year
Ended December 31, 1999................................... F-7
Note of Historical Cost Profits and Losses for the Year
Ended December 31, 1999................................... F-7
Reconciliation of Movements in Equity Shareholders' Funds
for the Year Ended December 31, 1999...................... F-7
Notes to the Accounts....................................... F-8
Principal Subsidiaries and Associates as at December 31,
1999...................................................... F-89
PEARSON PLC INTERIM RESULTS FOR THE SIX MONTHS TO JUNE 30,
2000 (UNAUDITED) F-91
Consolidated Profit and Loss Account........................ F-92
Consolidated Balance Sheet.................................. F-93
Statement of Total Recognized Gains and Losses.............. F-94
Reconciliation of Movements in Equity Shareholders' Funds... F-94
Consolidated Statement of Cash Flows........................ F-95
Notes to the Interim Results................................ F-96
SIMON & SCHUSTER (EXCLUDING CONSUMER) CARVE-OUT FINANCIAL
STATEMENTS
Report of Independent Accountants........................... F-101
Statements of Operations.................................... F-102
Balance Sheet............................................... F-103
Statements of Cash Flows.................................... F-104
Notes to Financial Statements............................... F-105
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PEARSON PLC
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in financial position (cash flows)
and of changes in capital stock, reserves not available for distribution and
unappropriated earnings (shareholders' equity) present fairly in all material
respects, the financial position of Pearson plc and its subsidiaries at
December 31, 1999 and 1998 and the results of their operations and their changes
in financial position (cash flows) for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United Kingdom. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Accounting principles generally accepted in the United Kingdom vary in
certain important (or significant) respects from accounting principles generally
accepted in the United States. The application of the latter would have affected
the determination of consolidated net income expressed in sterling for each of
the three years in the period ended December 31, 1999 and the determination of
consolidated stockholders' equity and consolidated financial position also
expressed in sterling at December 31, 1999 and 1998 to the extent summarised in
Note 34 to the consolidated financial statements.
PricewaterhouseCoopers
London
6 March 2000,
except for the information
presented in Notes 31 and 34,
for which the date is 12 May 2000
F-2
<PAGE>
PEARSON PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- -------------------------------- --------
OPERATING OTHER OPERATING OTHER RESTATED
ACTIVITIES ITEMS TOTAL ACTIVITIES ITEMS TOTAL TOTAL
NOTE ---------- -------- -------- ---------- -------- -------- --------
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SALES
Continuing operations.......... 3,304 - 3,304 2,251 - 2,251 2,011
Acquisitions................... 28 - 28 - - - -
------ ------ ------ ------ ------ ------ ------
3,332 - 3,332 2,251 - 2,251 2,011
Discontinued operations........ - - - 144 - 144 282
------ ------ ------ ------ ------ ------ ------
TOTAL SALES.................... 2 3,332 - 3,332 2,395 - 2,395 2,293
Cost of sales.................. 3 (1,414) (10) (1,424) (1,127) (49) (1,176) (1,114)
------ ------ ------ ------ ------ ------ ------
GROSS PROFIT................... 1,918 (10) 1,908 1,268 (49) 1,219 1,179
Net operating expenses--before
goodwill amortization........ (1,441) (90) (1,531) (930) (78) (1,008) (898)
Net operating expenses--
goodwill amortization........ 3 (130) - (130) (12) - (12) -
------ ------ ------ ------ ------ ------ ------
Net operating expenses......... 3 (1,571) (90) (1,661) (942) (78) (1,020) (898)
------ ------ ------ ------ ------ ------ ------
OPERATING PROFIT
Continuing operations--Group... 350 (100) 250 303 (127) 176 252
Acquisitions--Group............ (3) - (3) - - - -
------ ------ ------ ------ ------ ------ ------
347 (100) 247 303 (127) 176 252
Discontinued
operations--Group............ - - - 23 - 23 29
------ ------ ------ ------ ------ ------ ------
TOTAL OPERATING
PROFIT--GROUP................ 347 (100) 247 326 (127) 199 281
------ ------ ------ ------ ------ ------ ------
Share of operating profit of
associates:
Continuing operations.......... 24 - 24 11 - 11 -
Acquisitions--after goodwill
amortization of L1m.......... (1) - (1) - - - -
------ ------ ------ ------ ------ ------ ------
13 23 - 23 11 - 11 -
Discontinued operations........ 13 48 - 48 40 - 40 47
------ ------ ------ ------ ------ ------ ------
TOTAL SHARE OF OPERATING PROFIT
OF ASSOCIATES................ 13 71 - 71 51 - 51 47
====== ====== ====== ====== ====== ====== ======
Total operating profit analyzed
between:
Operating profit before
internet enterprises and
goodwill amortization........ 2 588 (100) 488 389 (127) 262 328
Internet enterprises........... 2 (39) - (39) - - - -
Goodwill amortization.......... (131) - (131) (12) - (12) -
------ ------ ------ ------ ------ ------ ------
TOTAL OPERATING PROFIT......... 2 418 (100) 318 377 (127) 250 328
====== ====== ====== ====== ====== ====== ======
</TABLE>
F-3
<PAGE>
PEARSON PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- -------------------------------- --------
OPERATING OTHER OPERATING OTHER RESTATED
ACTIVITIES ITEMS TOTAL ACTIVITIES ITEMS TOTAL TOTAL
NOTE ---------- -------- -------- ---------- -------- -------- --------
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing operations:
Profit on sale of fixed assets
and investments.............. 4 352 142 23
(Loss)/profit on sale of
businesses and associates.... 5 (44) 50 33
Discontinued operations:
Profit/(loss) on sale of
businesses and associates.... 5 - 215 (212)
------ ------ ------ ------ ------ ------ ------
308 407 (156)
Continuing operations:
Profit/(loss) on sale of
businesses and associates by
an associate................. 13 1 11 (1)
------ ------ ------ ------ ------ ------ ------
PROFIT BEFORE INTEREST......... 627 668 171
Net interest payable--Group.... 6 (145) (36) (37)
Net interest
payable--associates.......... 13 (2) (3) (5)
------ ------ ------ ------ ------ ------ ------
TOTAL NET INTEREST PAYABLE..... (147) (39) (42)
------ ------ ------ ------ ------ ------ ------
PROFIT BEFORE TAXATION......... 480 629 129
Taxation....................... 7 (180) (188) (89)
------ ------ ------ ------ ------ ------ ------
PROFIT AFTER TAXATION.......... 300 441 40
Equity minority interests...... (6) (4) (2)
------ ------ ------ ------ ------ ------ ------
PROFIT FOR THE FINANCIAL
YEAR......................... 294 437 38
Dividends on equity shares..... 8 (138) (126) (112)
------ ------ ------ ------ ------ ------ ------
PROFIT/(DEFICIT) RETAINED...... 156 311 (74)
====== ====== ====== ====== ====== ====== ======
ADJUSTED EARNINGS PER EQUITY
SHARE BEFORE INTERNET
ENTERPRISES.................. 9 53.3p 42.0p 34.9p
ADJUSTED EARNINGS PER EQUITY
SHARE AFTER INTERNET
ENTERPRISES.................. 9 48.5p 42.0p 34.9p
EARNINGS PER EQUITY SHARE...... 9 48.2p 74.1p 6.6p
DILUTED EARNINGS PER EQUITY
SHARE........................ 9 47.5p 73.3p 6.4p
DIVIDENDS PER EQUITY SHARE..... 8 22.5p 21.0p 19.5p
====== ====== ====== ====== ====== ====== ======
</TABLE>
------------------------
Note:
1997 has been restated to reflect the adoption of FRS 9 "Associates and Joint
Ventures" and FRS 14 "Earnings Per Share". There were no "other items" in 1997.
F-4
<PAGE>
PEARSON PLC
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
NOTE -------- --------
LM LM
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets........................................... 11 2,457 2,330
Tangible assets............................................. 12 405 435
Investments:
Associates.................................................. 13 234 145
Other....................................................... 14 99 168
------ ------
3,195 3,078
------ ------
CURRENT ASSETS
Stocks...................................................... 15 691 614
Debtors..................................................... 16 1,132 1,127
Investments................................................. 17 4 153
Cash at bank and in hand.................................... 18 328 345
------ ------
2,155 2,239
------ ------
CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR
Short-term borrowing........................................ 19 (47) (72)
Other creditors............................................. 20 (1,441) (1,282)
------ ------
(1,488) (1,354)
------ ------
NET CURRENT ASSETS.......................................... 667 885
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 3,862 3,963
CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Medium and long term borrowing.............................. 19 (2,276) (2,552)
Other creditors............................................. 20 (32) (54)
------ ------
(2,308) (2,606)
------ ------
PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation........................................... 21 (21) (20)
Other provisions for liabilities and charges................ 22 (206) (253)
------ ------
NET ASSETS.................................................. 1,327 1,084
------ ------
CAPITAL AND RESERVES
Called up share capital..................................... 23 153 152
Share premium account....................................... 24 517 498
Revaluation reserve......................................... 24 - 1
Other reserves.............................................. 24 - 1
Profit and loss account..................................... 24 651 396
------ ------
EQUITY SHAREHOLDERS' FUNDS.................................. 1,321 1,048
EQUITY MINORITY INTERESTS................................... 6 36
------ ------
1,327 1,084
====== ======
</TABLE>
F-5
<PAGE>
PEARSON PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
NOTE -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 27 433 402 204
------ ------ ----
DIVIDENDS FROM PARTNERSHIPS AND OTHER ASSOCIATES............ 44 53 40
------ ------ ----
Interest received........................................... 41 52 35
Interest paid............................................... (182) (88) (72)
Debt issue costs............................................ (5) (21) -
Dividends paid to minority interests........................ (1) (3) (1)
------ ------ ----
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............. (147) (60) (38)
------ ------ ----
TAXATION.................................................... (156) (80) (75)
------ ------ ----
Purchase of tangible fixed assets........................... (102) (125) (110)
Sale of tangible fixed assets............................... 36 14 22
Purchase of investments..................................... (24) (53) (12)
Sale of investments......................................... 14/17 624 199 148
------ ------ ----
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ 534 35 48
------ ------ ----
Purchase of subsidiary undertakings......................... (249) (2,936) (269)
Net cash acquired with subsidiary undertakings.............. - (2) 3
Purchase of associates...................................... (54) (13) (67)
Sale of subsidiary undertakings............................. 44 718 54
Net cash disposed with subsidiary undertakings.............. (3) (17) (1)
Sale of associates.......................................... 12 77 46
------ ------ ----
ACQUISITIONS AND DISPOSALS.................................. 25/26 (250) (2,173) (234)
------ ------ ----
EQUITY DIVIDENDS PAID....................................... (132) (113) (106)
------ ------ ----
NET CASH INFLOW/(OUTFLOW) BEFORE MANAGEMENT OF LIQUID
RESOURCES AND FINANCING................................... 326 (1,936) (161)
------ ------ ----
Disposal of asset backed securities......................... - - 89
Liquid resources acquired................................... (9) (1,261) (123)
Liquid resources disposed................................... 10 1,306 123
------ ------ ----
MANAGEMENT OF LIQUID RESOURCES.............................. 27 1 45 89
------ ------ ----
Issue of equity share capital............................... 18 344 27
Capital element of finance lease rentals.................... (11) (1) (1)
Unsecured bank loans repaid................................. - (141) -
Loan facility (repaid)/advanced............................. (1,112) 2,115 -
4.625% euro Bonds 2004 advanced............................. 358 - -
7% Sterling Bonds 2014 advanced............................. 250 - -
Loan stock repaid........................................... - - (68)
Net movement in other borrowings............................ 202 (280) 184
------ ------ ----
FINANCING................................................... (295) 2,037 142
------ ------ ----
INCREASE IN CASH IN THE YEAR................................ 27 32 146 70
====== ====== ====
</TABLE>
F-6
<PAGE>
PEARSON PLC
STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Profit for the financial year............................... 294 437 38
Other net gains and losses recognized in reserves:
Currency translation differences............................ 36 (8) (20)
----- ----- -----
Total recognized gains relating to the year................. 330 429 18
===== ===== =====
</TABLE>
NOTE OF HISTORICAL COST PROFITS AND LOSSES
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Reported profit before taxation............................. 480 629 129
Realization of property revaluations........................ - 2 2
----- ----- -----
Historical cost profit on ordinary activities before
taxation.................................................. 480 631 131
----- ----- -----
HISTORICAL COST PROFIT/(LOSS) RETAINED AFTER TAXATION,
EQUITY MINORITY INTERESTS AND DIVIDENDS................... 156 313 (72)
===== ===== =====
</TABLE>
RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Profit for the financial year............................... 294 437 38
Dividends on equity shares.................................. (138) (126) (112)
----- ----- -----
156 311 (74)
Other net recognized gains/(losses) relating to the year
(see above)............................................... 36 (8) (20)
Goodwill arising on prior year acquisitions................. - (16) (402)
Goodwill written back....................................... 63 262 233
Shares issued............................................... 18 347 27
----- ----- -----
Net movement for the year................................... 273 896 (236)
Equity shareholders' funds at beginning of the year......... 1,048 152 388
----- ----- -----
EQUITY SHAREHOLDERS' FUNDS AT END OF THE YEAR............... 1,321 1,048 152
===== ===== =====
</TABLE>
F-7
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS
1 ACCOUNTING POLICIES
Accounting policies have been consistently applied. FRS12 "Provisions,
Contingent Liabilities and Contingent Assets" has been adopted.
A) BASIS OF ACCOUNTING
The accounts are prepared under the historical cost convention, modified by
the revaluation of certain land and buildings and investments, and in accordance
with applicable accounting standards. A summary of the significant accounting
policies is set out below.
B) BASIS OF CONSOLIDATION
The consolidated accounts include the accounts of Pearson plc (the
"Company") and all its subsidiary and associated undertakings (the "Group" or
"Pearson") made up to December 31. Where companies have become or ceased to be
subsidiary or associated undertakings during the year the Group profit includes
profits for the period during which they were subsidiary or associated
undertakings.
From January 1, 1998 goodwill, being either the net excess of the cost of
shares in subsidiary undertakings, partnerships and other associates over the
value attributable to their net assets on acquisition or the cost of other
goodwill by purchase, is capitalized and amortized through the profit and loss
account over its estimated useful life not exceeding 20 years. Estimated useful
life is determined after taking into account such factors as the nature and age
of the business and the stability of the industry in which the acquired business
operates as well as typical life spans of the acquired products to which the
goodwill attaches. Goodwill is subject to an impairment review at the end of the
first full year following an acquisition and at any other time if events or
changes in circumstances indicate that the carrying value may not be
recoverable. Goodwill arising on acquisitions before January 1, 1998 has been
deducted from reserves and is charged or credited to the profit and loss account
on disposal or closure of the business to which it relates.
The profit of the Group includes the Group's share of the profit of
partnerships and other associates, and the consolidated balance sheet includes
the Group's interest in partnerships and other associates at the book value of
attributable net tangible assets. The figures included in the financial
statements have been based on audited accounts, adjusted where necessary by
reference to unaudited management accounts for the subsequent period to
December 31.
C) SALES
Sales represent the amount of goods and services, net of value added tax and
other sales taxes, and excluding trade discounts and anticipated returns,
provided to external customers and associated undertakings.
D) FOREIGN CURRENCIES
Profit and loss accounts in overseas currencies are translated into sterling
at average rates. Balance sheets are translated into sterling at the rates
ruling at December 31. Exchange differences arising on consolidation are taken
directly to reserves. Other exchange differences are taken to the profit and
loss account where they relate to trading transactions and directly to reserves
where they relate to investments.
F-8
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
1 ACCOUNTING POLICIES (CONTINUED)
The principal overseas currency for the Group is the US dollar. The average
rate for the year against Sterling was $1.61 (1998: $1.66; 1997: $1.63) and the
year end rate was $1.61 (1998: $1.66; 1997: $1.65).
E) PENSION COSTS
The regular pension cost of the Group's defined benefit pension schemes is
charged to the profit and loss account in order to apportion the cost of
pensions over the service lives of employees in the schemes. Variations arising
from a significant reduction in the number of employees are adjusted in the
profit and loss account to the extent that the year's regular pension cost,
reduced by other variations, exceeds contributions payable for that year. Other
variations are apportioned over the expected service lives of current employees
in the schemes.
F) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Post-retirement benefits other than pensions are accounted for on an
accruals basis to recognize this obligation over the expected service lives of
the employees concerned.
G) CHANNEL 5
The Group's share of certain Channel 5 initial costs is being amortized.
These costs will be amortized by the end of the ten year licence period. The
Group's share of other profits and losses is being equity accounted.
H) TANGIBLE FIXED ASSETS
The cost or subsequent valuation of tangible fixed assets other than
freehold land and investment properties is depreciated over estimated economic
lives in equal annual amounts at the rates indicated in note 12.
I) LEASES
Finance lease rentals are capitalized at the total amount of rentals payable
under the leasing agreement (excluding finance charges) and depreciated in
accordance with policy h above. Finance charges are written off over the period
of the lease in reducing amounts in relation to the written down carrying cost.
Operating lease rentals are expensed as incurred.
J) FIXED ASSETS INVESTMENTS
Fixed asset investments are stated at cost less provisions for diminution in
value, or as revalued by the directors.
K) STOCKS
Stocks and work in progress are valued at the lower of cost and net
realizable value.
F-9
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
1 ACCOUNTING POLICIES (CONTINUED)
L) PRODUCT DEVELOPMENT COSTS
Revenue investment in the development of newspaper titles consists of
measures to increase the volume and geographical spread of circulation. These
measures include additional editorial content, distribution and remote printing.
The extra costs arising are expensed as incurred:
- Pre-publication costs, the direct cost incurred in the development of
titles prior to their publication, are included within stocks and are
amortized over their estimated economic lives.
- Advances to authors are included within debtors net of any provision
required for net realizable value and are expensed at contracted rates
based on sales of the related titles.
- Television program production costs are included within stocks and are
amortized over the estimated period in which the related revenue is
forecast to be earned.
M) DEFERRED TAXATION
Deferred taxation is provided, using the liability method, at the expected
applicable rates, on all timing differences between accounting and taxation
treatments, including those arising from the revaluation of fixed assets, which
are expected to reverse in the foreseeable future.
N) FINANCIAL INSTRUMENTS
The Group uses derivative financial instruments to manage its exposure to
interest rate and foreign exchange risks. These include interest rate swaps,
currency swaps and forward currency contracts. Amounts payable or receivable in
respect of interest rate derivatives are accrued with net interest payable over
the period of the contract. Where the derivative instrument is terminated early
the gain or loss is spread over the remaining maturity of the original
instrument. Foreign currency borrowings and their related derivatives are
carried in the balance sheet at the relevant exchange rates at the balance sheet
date. Gains or losses in respect of the hedging of overseas subsidiary
undertakings are taken to reserves. Gains or losses arising from foreign
exchange contracts are taken to the profit and loss account in line with the
transactions which they are hedging.
The Company participates in offset arrangements with certain banks whereby
cash and overdraft amounts are offset against each other.
O) LIQUID RESOURCES
Liquid resources comprise short-term deposits of less than one year and
investments which are readily realizable and held on a short-term basis.
P) RETAINED PROFITS OF OVERSEAS SUBSIDIARIES AND ASSOCIATES
No provision is made for any additional taxation, less double taxation
relief, which would arise on the remittance of profits retained where there is
no intention to remit such profits.
F-10
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
2 A) ANALYSIS OF SALES AND OPERATING PROFIT
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------- -------------------------------------- --------------------
OPERATING OPERATING OPERATING OPERATING
PROFIT PROFIT PROFIT PROFIT
BEFORE AFTER BEFORE AFTER
INTERNET INTERNET INTERNET INTERNET
ENTERPRISES, ENTERPRISES, ENTERPRISES, ENTERPRISES,
GOODWILL GOODWILL GOODWILL GOODWILL
AMORTIZATION AMORTIZATION AMORTIZATION AMORTIZATION RESTATED
& OTHER & OTHER & OTHER & OTHER OPERATING
SALES ITEMS ITEMS SALES ITEMS ITEMS SALES PROFIT
-------- ------------ ------------ -------- ------------ ------------ -------- ---------
LM LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BUSINESS SECTORS
FT Group................ 687 150 103 683 118 114 676 108
Pearson Education....... 1,725 257 36 702 99 (34) 563 60
The Penguin Group....... 565 65 64 523 48 46 525 58
Pearson Television...... 355 68 67 343 61 61 247 26
----- --- --- ----- --- --- ----- ---
Continuing operations... 3,332 540 270 2,251 326 187 2,011 252
Discontinued
operations............ - 48 48 144 63 63 282 76
----- --- --- ----- --- --- ----- ---
3,332 588 318 2,395 389 250 2,293 328
----- --- --- ----- --- --- ----- ---
GEOGRAPHICAL MARKETS
SUPPLIED
United Kingdom.......... 544 46 (4) 497 38 35 487 39
Continental Europe...... 518 110 103 461 109 106 382 73
North America........... 1,990 340 134 1,078 157 30 916 110
Asia Pacific............ 200 29 23 161 16 11 179 23
Rest of World........... 80 15 14 54 6 5 47 7
----- --- --- ----- --- --- ----- ---
Continuing operations... 3,332 540 270 2,251 326 187 2,011 252
Discontinued
operations............ - 48 48 144 63 63 282 76
----- --- --- ----- --- --- ----- ---
3,332 588 318 2,395 389 250 2,293 328
===== === === ===== === === ===== ===
</TABLE>
------------------------------
Note:
"Other items" comprises exceptional items of L95m (1998: L120m) and Year 2000
compliance costs of L5m (1998: L7m). Exceptional items comprise integration
costs following the acquisition of Simon & Schuster in 1998. These all relate to
the Pearson Education business sector. The results of Simon & Schuster are
included within the Pearson Education business sector and are mainly within
North America. The results of internet enterprises, the Group's discrete
internet operations, are included within FT Group L36m and Pearson Education
L3m. Discontinued operations arising in 1999 relate to the withdrawal of the
Group from the banking business following its disposal of Lazard on March 3,
2000.
Discontinued operations arising in 1998 relate to the withdrawal of the Group
from the consumer software business following its disposal of Mindscape Inc. in
March 1998, the withdrawal of the Group from the consumer magazine business
following its disposal of Pearson New Entertainment in April 1998 and the
withdrawal of the Group from the visitor attractions business following its
disposal of The Tussauds Group in October 1998.
1997 operating profit is stated after restructuring costs of L34m which were
classified as exceptional within operating activities. These related to FT
Group, L14m, Pearson Education, L12m, Pearson Television, L4m and discontinued
businesses, L4m, and are shown mainly within United Kingdom, L16m, and North
America, L17m.
Analyses of the profits of associates are shown in note 13.
F-11
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
2 A) ANALYSIS OF SALES AND OPERATING PROFIT (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
TOTAL TOTAL TOTAL
BY INTER- BY INTER- BY INTER-
SOURCE REGIONAL SALES SOURCE REGIONAL SALES SOURCE REGIONAL SALES
-------- -------- -------- -------- -------- -------- -------- -------- --------
LM LM LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GEOGRAPHICAL SOURCE OF SALES
United Kingdom................. 820 (52) 768 728 (52) 676 703 (46) 657
Continental Europe............. 394 (6) 388 355 (6) 349 302 (7) 295
North America.................. 1,991 (18) 1,973 1,108 (28) 1,080 928 (19) 909
Asia Pacific................... 159 (4) 155 129 (4) 125 144 (7) 137
Rest of World.................. 50 (2) 48 22 (1) 21 13 - 13
----- --- ----- ----- --- ----- ----- --- -----
Continuing operations.......... 3,414 (82) 3,332 2,342 (91) 2,251 2,090 (79) 2,011
Discontinued operations........ - - - 144 - 144 284 (2) 282
----- --- ----- ----- --- ----- ----- --- -----
3,414 (82) 3,332 2,486 (91) 2,395 2,374 (81) 2,293
===== === ===== ===== === ===== ===== === =====
</TABLE>
------------------------
Note:
The table above analyzes sales by the geographical region from which the
products and services originate.
Inter-regional sales are those made between the Group companies in different
regions.
F-12
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
2 B) ANALYSIS OF CAPITAL EMPLOYED
<TABLE>
<CAPTION>
1999 1998
CAPITAL CAPITAL
EMPLOYED EMPLOYED
---------- ----------
LM LM
<S> <C> <C>
BUSINESS SECTORS
FT Group.................................................... 408 143
Pearson Education........................................... 2,877 3,200
The Penguin Group........................................... 193 143
Pearson Television.......................................... (78) 39
------ ------
Continuing operations....................................... 3,400 3,525
Discontinued operations..................................... 149 111
------ ------
3,549 3,636
====== ======
GEOGRAPHICAL LOCATION
United Kingdom.............................................. (30) 129
Continental Europe.......................................... 313 217
North America............................................... 3,023 3,041
Asia Pacific................................................ 22 96
Rest of World............................................... 72 42
------ ------
Continuing operations....................................... 3,400 3,525
Discontinued operations..................................... 149 111
------ ------
3,549 3,636
====== ======
RECONCILIATION OF CAPITAL EMPLOYED TO NET ASSETS
Capital employed............................................ 3,549 3,636
Less: deferred taxation..................................... (21) (20)
Less: other provisions...................................... (206) (253)
Less: net debt.............................................. (1,995) (2,279)
------ ------
NET ASSETS.................................................. 1,327 1,084
====== ======
</TABLE>
F-13
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------------------------------ ------------------------------
CON- DISCON- CON- DISCON-
TOTAL TINUING TINUED TOTAL TINUING TINUED TOTAL
-------- -------- -------- -------- -------- -------- --------
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C>
COST OF SALES............................... (1,424) (1,138) (38) (1,176) (1,003) (111) (1,114)
------ ------ --- ------ ------ ---- ------
Distribution costs.......................... (289) (168) (1) (169) (123) (3) (126)
Administration and other expenses........... (1,470) (848) (85) (933) (701) (143) (844)
Other operating income (see below).......... 98 79 3 82 68 4 72
------ ------ --- ------ ------ ---- ------
NET OPERATING EXPENSES...................... (1,661) (937) (83) (1,020) (756) (142) (898)
====== ====== === ====== ====== ==== ======
Analyzed as:
Net operating expenses-before exceptional
items and goodwill amortization........... (1,446) (854) (83) (937) (726) (138) (864)
Net operating expenses-exceptional items.... (85) (71) - (71) (30) (4) (34)
Net operating expenses-goodwill
amortization.............................. (130) (12) - (12) - - -
------ ------ --- ------ ------ ---- ------
NET OPERATING EXPENSES...................... (1,661) (937) (83) (1,020) (756) (142) (898)
====== ====== === ====== ====== ==== ======
</TABLE>
------------------------------
Note:
The following amounts are included in the 1999 totals in respect of
acquisitions: cost of sales L14m (1998: L74m; 1997: L15m) and net operating
expenses L17m (1998: L95m; 1997: L13m). The exceptional expense of L95m in 1999
(1998: L120m; 1997: L34m) is included within cost of sales L10m (1998: L49m;
1997: Lnil) and administration and other expenses L85m (1998: L71m; 1997: L34m)
(see note 2).
F-14
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
3 ANALYSIS OF CONSOLIDATED PROFIT AND LOSS ACCOUNT (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
OTHER OPERATING INCOME:
Income from other investments:
Listed...................................................... - - 2
Unlisted.................................................... 3 14 13
BSBH loan stock interest.................................... 1 4 4
Other operating income (mainly royalties, rights and
commission income)........................................ 94 64 53
----- ----- -----
98 82 72
===== ===== =====
PROFIT BEFORE TAXATION IS STATED AFTER CHARGING:
Depreciation................................................ 82 66 65
Operating lease rentals:
Plant and machinery......................................... 22 17 12
Properties.................................................. 61 41 36
Other....................................................... 12 4 5
Year 2000 compliance costs.................................. 5 7 -
Auditors' remuneration:
Audit....................................................... 2 2 2
Non-audit--UK (Company Lnil; 1998: Lnil, 1997: Lnil)........ 2 2 2
Non-audit--Other............................................ 2 2 -
===== ===== =====
</TABLE>
------------------------------
Note:
In addition to the non-audit fees (UK) of L2m (1998: L2m; 1997: L2m),
consultancy fees of L6m (1998: L7m; 1997: L8m) have been incurred in respect of
systems development. These fees have been capitalized. Fees of L2m (1998: L2m;
1997 Lnil) were also incurred in the UK in respect of acquisition and disposals.
These fees have also been capitalized. Audit fees of the Company amounted to
L0.1m (1998: L0.1m; 1997: L0.1m).
4 PROFIT ON SALE OF FIXED ASSETS AND INVESTMENTS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Profit on disposal of interest in BSB Holdings Ltd (BSBH)
(see note 14)............................................. 348 - -
Profit on sale of investments in Societe Europeenne des
Satellites................................................ - 133 -
Profit on sale in investment in Flextech plc................ - 27 24
Loss on sale of fixed assets relating to the Simon &
Schuster acquisition...................................... (3) (6) -
Net profit/(loss) on other investments and property
interests................................................. 7 (12) (1)
----- ----- -----
352 142 23
===== ===== =====
Taxation.................................................... (93) (40) (4)
===== ===== =====
</TABLE>
F-15
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
5 (LOSS)/PROFIT ON SALE OF BUSINESSES AND ASSOCIATES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Loss on sale of Extel research products business (see note
26)....................................................... (19) - -
Profit on sale of Law & Tax publishing business............. - 61 -
Profit on sale of 20% of Recoletos.......................... - 34 -
Loss on sale of Register group.............................. - (20) -
Loss on closure of Simon & Schuster businesses.............. (12) (10) -
Profit on sale of Churchill Livingstone..................... - 2 30
Profit on sale of Troll Communications LLC.................. - - 13
Net loss on sale of other businesses and associates......... (13) (17) (10)
--- ---- ----
(44) 50 33
=== ==== ====
DISCONTINUED OPERATIONS:
Profit on sale of The Tussauds Group........................ - 157 -
Profit on sale of Pearson New Entertainment................. - 41 -
Profit on sale of Port Aventura SA.......................... - 28 -
Loss on sale of Mindscape Inc............................... - (11) -
Provision against goodwill on the sale of Mindscape Inc..... - - (212)
--- ---- ----
- 215 (212)
=== ==== ====
Taxation.................................................... 5 (63) (1)
=== ==== ====
</TABLE>
6 NET INTEREST PAYABLE--GROUP
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
INTEREST PAYABLE AND SIMILAR CHARGES:
On borrowing repayable wholly within five years not by
installments.............................................. (155) (43) (32)
On borrowing repayable wholly or partly after five years.... (29) (44) (45)
---- --- ---
(184) (87) (77)
==== === ===
INTEREST RECEIVABLE AND SIMILAR INCOME:
On deposits and liquid funds................................ 29 48 37
On discounted proceeds on businesses held for resale (see
note 17).................................................. 7 - -
Amortization of swap proceeds (see note 20)................. 3 3 3
---- --- ---
NET INTEREST PAYABLE........................................ (145) (36) (37)
==== === ===
</TABLE>
F-16
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
7 TAXATION
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
UK:
Corporation tax at 30.2% (1998: 31%; 1997: 31.5%)........... 104 134 37
Deferred taxation........................................... 6 (4) 11
Double taxation relief...................................... (1) (1) (1)
Tax on franked investment income............................ 4 - -
Associates.................................................. 9 8 5
OVERSEAS:
Overseas taxation........................................... 52 45 30
Deferred taxation........................................... - 1 2
Associates.................................................. 6 5 5
----- ----- -----
180 188 89
===== ===== =====
% % %
TAX RATE RECONCILIATION
UK tax rate................................................. 30.2 31.0 31.5
Effect of utilization of tax losses in the US............... (7.7) (2.7) (4.3)
Other items................................................. 2.5 (0.3) 2.2
----- ----- -----
Tax rate reflected in adjusted earnings..................... 25.0 28.0 29.4
Effect of profits/(losses) excluded from adjusted
earnings.................................................. 12.5 1.9 39.5
----- ----- -----
TAX RATE REFLECTED IN EARNINGS.............................. 37.5 29.9 68.9
===== ===== =====
</TABLE>
------------------------------
Note:
The Group continues to have substantial tax losses available in the US, which
are not recognized in the accounts. Following the acquisition of Simon &
Schuster at the end of 1998, US profits are higher in 1999 than in 1998 but are
still more than offset by the available losses so reducing the Group tax rate
reflected in adjusted earnings. As in 1998, relief has not been taken for the
Simon & Schuster integration costs to the extent that they arose in the US,
hence increasing the effective tax rate on earnings.
The 1997 tax rate has been affected by two significant factors:
- The Group has substantial tax losses in the US which have not been recognized
in the accounts and more than offset 1997 profits, so reducing the Group tax
rate reflected in adjusted earnings.
- There is no tax payable on the profit arising from the disposal of Television
Broadcasts Limited and the tax payable on the disposal of Flextech plc is
reduced by capital losses brought forward. The provision against goodwill on
the sale of Mindscape Inc. has had no impact on 1997 tax.
8 DIVIDENDS
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
PENCE PENCE PENCE
PER SHARE LM PER SHARE LM PER SHARE LM
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interim paid....................... 8.6 53 8.0 47 7.5 43
Final proposed..................... 13.9 85 13.0 79 12.0 69
----- ----- ----- ----- ----- -----
DIVIDENDS FOR THE YEAR............. 22.5 138 21.0 126 19.5 112
===== ===== ===== ===== ===== =====
</TABLE>
F-17
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
9 EARNINGS PER SHARE
In order to show results from operating activities on a comparable basis two
adjusted earnings per equity share are presented. First, an adjusted earnings
per share is presented which excludes profits or losses on the sale of fixed
assets and investments, businesses and associates (see notes 4 and 5), Year 2000
compliance costs and integration costs in respect of the acquisition of Simon &
Schuster (see note 2). Goodwill amortization has also been excluded from
adjusted earnings calculation following the prospective implementation of FRS10
"Goodwill and Intangible Assets" in 1998. Due to a significant level of
expenditure in 1999 on new internet enterprises, a second adjusted earnings per
equity share is presented in which the results of these are also excluded from
earnings.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE
LM (P) LM (P) LM (P)
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basis earnings........................................ 294 48.2 437 74.1 38 6.6
Less:
(Profit) on sale of fixed assets and investments:
continuing operations............................... (352) (57.7) (142) (24.1) (23) (4.0)
Loss/(profit) on sale of businesses and associates:
continuing operations............................... 44 7.2 (50) (8.5) (33) (5.8)
(Profit)/loss on sale of businesses and associates:
discontinued operations............................. - - (215) (36.4) 212 37.0
(Profit)/loss on sale of businesses and associates by
an associate: continuing operations................. (1) (0.2) (11) (1.9) 1 0.2
Add:
Internet enterprises.................................. 39 6.4 - - - -
Goodwill amortization................................. 131 21.5 12 2.0 - -
Simon & Schuster integration costs.................... 95 15.6 120 20.3 - -
Year 2000 compliance costs............................ 5 0.8 7 1.2 - -
Taxation on above items............................... 70 11.5 90 15.3 5 0.9
----- ----- ----- ----- ----- -----
Adjusted earnings before internet enterprises......... 325 53.3 248 42.0 200 34.9
===== ===== ===== ===== ===== =====
Internet enterprises.................................. (39) (6.4) - - - -
Taxation on internet enterprises...................... 10 1.6 - - - -
----- ----- ----- ----- ----- -----
Adjusted earnings after internet enterprises.......... 296 48.5 248 42.0 200 34.9
===== ===== ===== ===== ===== =====
Earnings.............................................. 294 437 38
Taxation on the conversion of ordinary shares......... (1) (1) (1)
----- ----- ----- ----- ----- -----
Diluted earnings...................................... 293 436 37
===== ===== ===== ===== ===== =====
Weighted average number of equity shares
(millions)--for earnings and adjusted earnings...... 610.2 589.8 572.8
Effect of dilutive share options...................... 7.0 5.1 4.7
----- ----- ----- ----- ----- -----
Weighted average number of equity shares
(millions)--for diluted earnings.................... 617.2 594.9 577.5
===== ===== ===== ===== ===== =====
Adjusted earnings per equity share before internet
enterprises......................................... 53.3p 42.0p 34.9p
Adjusted earning per equity share after internet
enterprises......................................... 48.5p 42.0p 34.9p
Earnings per equity shares............................ 48.2p 74.1p 6.6p
Diluted earnings per equity share..................... 47.5p 73.3p 6.4p
===== ===== ===== ===== ===== =====
</TABLE>
------------------------------
Note:
1997 weighted average number of equity shares has been restated in accordance
with FRS14 "Earnings Per Share".
F-18
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
10 EMPLOYEE INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
STAFF COSTS
Wages and salaries.......................................... 702 476 454
Social security costs....................................... 75 54 46
Post-retirement costs....................................... 26 13 10
--- --- ---
803 543 510
=== === ===
</TABLE>
<TABLE>
<CAPTION>
UK US OTHER TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AVERAGE NUMBER EMPLOYED 1999
FT Group.................................................... 2,158 1,034 1,790 4,982
Pearson Education........................................... 1,761 9,970 2,394 14,125
The Penguin Group........................................... 749 1,866 614 3,229
Pearson Television.......................................... 617 105 550 1,272
Other....................................................... 171 93 - 264
----- ------ ----- ------
Continuing operations....................................... 5,456 13,068 5,348 23,872
===== ====== ===== ======
AVERAGE NUMBER EMPLOYED 1998
FT Group.................................................... 2,780 832 1,858 5,470
Pearson Education........................................... 764 3,171 1,489 5,424
The Penguin Group........................................... 989 1,728 601 3,318
Pearson Television.......................................... 585 113 450 1,148
Other....................................................... 171 48 - 219
----- ------ ----- ------
Continuing operations....................................... 5,289 5,892 4,398 15,579
Discontinued operations..................................... 2,614 131 76 2,821
----- ------ ----- ------
7,903 6,023 4,474 18,400
===== ====== ===== ======
AVERAGE NUMBER EMPLOYED 1997
FT Group.................................................... 3,093 902 1,834 5,829
Pearson Education........................................... 818 2,498 1,279 4,595
The Penguin Group........................................... 895 1,728 582 3,205
Pearson Television.......................................... 278 40 362 680
Other....................................................... 124 93 - 217
----- ------ ----- ------
Continuing operations....................................... 5,208 5,261 4,057 14,526
Discontinued operations..................................... 3,187 424 169 3,780
----- ------ ----- ------
8,395 5,685 4,226 18,306
===== ====== ===== ======
</TABLE>
F-19
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
10 EMPLOYEE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
POST-RETIREMENT COSTS
Defined benefit pension schemes
UK Group plan: regular pension cost......................... 8 8 9
UK Group plan: amortization of surplus...................... (3) (9) (13)
--- --- ---
Net pension charge/(credit)................................. 5 (1) (4)
Other defined benefit pension schemes....................... 11 6 6
Defined contribution pension schemes........................ 6 5 6
Medical benefits............................................ 4 3 2
--- --- ---
26 13 10
=== === ===
</TABLE>
PENSION SCHEMES
The Group operates a number of pension schemes throughout the world. The
major schemes are self-administered and the schemes' assets are held
independently of the Group. Pension costs are assessed in accordance with the
advice of independent qualified actuaries. The principal schemes are primarily
of the defined benefit type. There is also a closed defined benefit scheme in
the UK, which now receives neither employers' nor members' contributions, and a
number of other defined benefit and defined contribution schemes, principally
overseas.
The results of the most recent actuarial valuation performed as at
January 1, 1999, using the projected unit method of valuation, of the principal
funded UK scheme, and the principal assumptions are shown in the table below.
The net assets of the UK Group plan at December 31, 1999 are included in the
pension plan accounts at L1,192m (unaudited).
<TABLE>
<CAPTION>
UK GROUP PLAN
--------------
<S> <C>
Assets at market value at latest full actuarial valuation on
January 1, 1999........................................... L1,038m
Real return on investments per annum........................ 3.9%
Real increase in earnings per annum......................... 1.9%
Real increase in pensions in payment per annum.............. 0.0%
Real increase in dividends per annum........................ 1.0%
Level of funding*........................................... 105%
==============
</TABLE>
------------------------
*Actuarial value of assets expressed as a percentage of the actuarial value of
the liabilities.
In view of these results, all employers' contributions remain suspended for
the time being and the valuation surplus is being apportioned, in accordance
with SSAP24, over the expected remaining service lives of the current employees.
The total market value of the assets of the non-UK defined benefit schemes
(mainly in the US), valued this year, was L64m (1998: L63m; 1997: L48m).
F-20
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
10 EMPLOYEE INFORMATION (CONTINUED)
OTHER POST-RETIREMENT BENEFITS
The Group provides certain health care and life assurance benefits
principally for retired US employees and their dependants. These plans are
unfunded. Retirees are eligible for participation if they meet certain age and
service requirements. Plans that are available vary based upon the business
division in which the retiree worked. Plan choices and retiree contributions are
dependent on retirement date, business unit, option chosen and length of
service.
The principal assumptions affecting the provision for other post-retirement
benefits were: medical inflation rates of between 5.0% and 7.0% and a discount
rate of 6.75%.
11 INTANGIBLE ASSETS
<TABLE>
<CAPTION>
GOODWILL GOODWILL
TOTAL TOTAL
1999 1998
--------- ---------
LM LM
<S> <C> <C>
COST
At December 31.............................................. 2,342 -
Exchange differences........................................ 71 (6)
Additions (see note 25)..................................... 187 2,348
Disposals (see note 26)..................................... (1) -
----- -----
AT DECEMBER 31.............................................. 2,599 2,342
===== =====
AMORTIZATION
At December 31.............................................. (12) -
Provided in the year........................................ (130) (12)
----- -----
AT DECEMBER 31.............................................. (142) (12)
===== =====
NET CARRYING AMOUNT
AT DECEMBER 31.............................................. 2,457 2,330
===== =====
</TABLE>
F-21
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
12 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
1999
--------------------------------------------------
FREEHOLD
AND ASSETS IN
LEASEHOLD PLANT AND COURSE OF
PROPERTY EQUIPMENT CONSTRUCTION TOTAL
---------- ----------- ------------ --------
LM LM LM LM
<S> <C> <C> <C> <C>
COST OR AS VALUED
At December 31, 1998.......................... 249 527 18 794
Exchange differences.......................... 2 2 - 4
Reclassifications............................. 3 9 (12) -
Owned by subsidiary undertakings acquired..... - (8) - (8)
Capital expenditure........................... 18 77 21 116
Disposals..................................... (36) (49) (6) (91)
Owned by subsidiary undertakings disposed..... (1) (21) - (22)
--- ---- --- ----
AT DECEMBER 31, 1999.......................... 235 537 21 793
=== ==== === ====
DEPRECIATION
At December 31, 1998.......................... (78) (281) - (359)
Exchange differences.......................... (1) (1) - (2)
Impairment in value........................... - (11) - (11)
Provided in the year.......................... (12) (70) - (82)
Subsidiary undertakings acquired.............. - 4 - 4
Disposals..................................... 10 44 - 54
Subsidiary undertakings disposed.............. - 8 - 8
--- ---- --- ----
AT DECEMBER 31, 1999.......................... (81) (307) - (388)
=== ==== === ====
NET BOOK VALUE
At December 31, 1998.......................... 171 246 18 435
--- ---- --- ----
AT DECEMBER 31, 1999.......................... 154 230 21 405
=== ==== === ====
</TABLE>
F-22
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
12 TANGIBLE FIXED ASSETS (CONTINUED)
<TABLE>
<CAPTION>
1998
--------------------------------------------------
FREEHOLD
AND ASSETS IN
LEASEHOLD PLANT AND COURSE OF
PROPERTY EQUIPMENT CONSTRUCTION TOTAL
---------- ----------- ------------ --------
LM LM LM LM
<S> <C> <C> <C> <C>
COST OR AS VALUED
At December 31, 1997.......................... 319 485 37 841
Exchange differences.......................... - 2 - 2
Reclassifications............................. - 13 (13) -
Owned by subsidiary undertakings acquired..... 42 205 1 248
Capital expenditure........................... 15 60 34 109
Disposals..................................... (7) (43) (35) (85)
Owned by subsidiary undertakings disposed..... (120) (195) (6) (321)
---- ---- --- ----
AT DECEMBER 31, 1998.......................... 249 527 18 794
==== ==== === ====
DEPRECIATION
At December 31, 1997.......................... (71) (264) - (335)
Exchange differences.......................... - - - -
Reclassifications............................. 1 (1) - -
Impairment in value........................... (6) (5) - (11)
Provided in the year.......................... (10) (56) - (66)
Subsidiary undertakings acquired.............. (12) (93) - (105)
Disposals..................................... 3 37 - 40
Subsidiary undertakings disposed.............. 17 101 - 118
---- ---- --- ----
AT DECEMBER 31, 1998.......................... (78) (281) - (359)
==== ==== === ====
NET BOOK VALUE
At December 31, 1997.......................... 248 221 37 506
---- ---- --- ----
AT DECEMBER 31, 1998.......................... 171 246 18 435
==== ==== === ====
</TABLE>
FREEHOLD AND LEASEHOLD PROPERTY
Net book value includes: freehold of L113m (1998: L133m), short leases of
L41m (1998: L38m).
DEPRECIATION
Fixed assets are depreciated over their estimated economic lives in equal
annual amounts. Generally, freeholds are depreciated at 1% to 5% per annum,
leaseholds at 2% per annum, or over the period of the lease if shorter, and
plant and equipment at various rates between 5% and 33% per annum. Land,
amounting to L32m (1998: L40m), is not depreciated.
CAPITAL COMMITMENTS
The Group had capital commitments for fixed assets, including finance
leases, already under contract amounting to L20m at December 31, 1999 (1998:
L45m).
F-23
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
12 TANGIBLE FIXED ASSETS (CONTINUED)
OTHER NOTES
The net book value of Group tangible fixed assets includes L23m (1998: L20m)
in respect of assets held under finance leases. Depreciation on these assets
charged in 1999 was L2m (1998: L1m).
13 ASSOCIATES
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
VALUATIONS BOOK VALUE VALUATIONS BOOK VALUE
---------- ----------- ---------- -----------
LM LM LM LM
<S> <C> <C> <C> <C>
Partnership interests.................... 410 149 200 111
Unlisted associates...................... 426 18 189 (31)
Loans.................................... 67 67 65 65
--- --- --- ---
903 234 454 145
=== === === ===
</TABLE>
------------------------------
Note:
Principal associates are listed on page F-90. The valuations of unlisted
partnerships and other associates are at directors' valuations as at
December 31, 1999. If realized at these values there would be an estimated
liability for taxation, at year end rates, of L161m (1998: L68m). The Group had
no capital commitments to subscribe for further capital and loan stock.
<TABLE>
<CAPTION>
SHARE TOTAL
OF NET
EQUITY LOANS RESERVES TOTAL GOODWILL ASSETS
-------- -------- --------- -------- --------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF MOVEMENTS
At December 31, 1998....................... 77 65 3 145 - 145
Exchange differences....................... (2) - (1) (3) (2) (5)
Additions.................................. 23 2 - 25 29 54
Retained profit for the year............... - - 41 41 - 41
Goodwill amortization...................... - - - - (1) (1)
--- --- --- --- --- ---
AT DECEMBER 31, 1999....................... 98 67 43 208 26 234
=== === === === === ===
</TABLE>
F-24
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
13 ASSOCIATES (CONTINUED)
<TABLE>
<CAPTION>
SHARE
OF
EQUITY LOANS RESERVES TOTAL
-------- -------- --------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
SUMMARY OF MOVEMENTS
At December 31, 1997................................... 87 107 4 198
Exchange differences................................... (2) - - (2)
Additions.............................................. 2 11 - 13
Goodwill written back.................................. 16 - 1 17
Owned by subsidiary undertakings disposed.............. - (6) - (6)
Disposals.............................................. (26) (47) 22 (51)
Retained loss for the year............................. - - (24) (24)
--- --- --- ---
AT DECEMBER 31, 1998................................... 77 65 3 145
=== === === ===
</TABLE>
------------------------------
Note:
During 1998 the Group sold its 40.5% share in Port Aventura SA for L56m giving
rise to a profit on sale of L28m before tax estimated at L6m. This includes
compensation of L18m from Port Aventura SA for the cancellation of the
management agreement. During 1998 the Group also sold its 20% share in the
Canadian Financial Post for L13m giving rise to a profit on sale of L8m before
tax estimated at L4m.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
OPERATING TOTAL NET OPERATING TOTAL NET OPERATING TOTAL NET
PROFIT ASSETS PROFIT ASSETS PROFIT ASSETS
---------- --------- ---------- --------- ---------- ---------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
ANALYSIS OF PARTNERSHIPS AND
OTHER ASSOCIATES
BUSINESS SECTORS
FT Group........................ 14 63 15 6 16 (3)
Pearson Education............... 6 7 4 5 3 5
The Penguin Group............... - - - - 1 1
Pearson Television.............. 3 15 (8) 23 (20) 49
-- --- -- --- --- ---
Continuing operations........... 23 85 11 34 - 52
Discontinued operations......... 48 149 40 111 47 146
-- --- -- --- --- ---
71 234 51 145 47 198
== === == === === ===
GEOGRAPHICAL MARKETS SUPPLIED
AND LOCATION OF NET ASSETS
United Kingdom.................. - 2 (3) 18 (16) 40
Continental Europe.............. 10 56 6 7 5 6
North America................... 8 14 5 1 6 (1)
Rest of World................... 5 13 3 8 5 7
-- --- -- --- --- ---
Continuing operations........... 23 85 11 34 - 52
Discontinued operations......... 48 149 40 111 47 146
-- --- -- --- --- ---
71 234 51 145 47 198
== === == === === ===
</TABLE>
F-25
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
13 ASSOCIATES (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
RECONCILIATION TO RETAINED PROFIT/(LOSS)
Operating profit of partnerships and other associates....... 71 51
Net interest payable of other associates.................... (2) (3)
Profit on sale of business by an associate.................. 1 11
UK taxation................................................. (9) (8)
Overseas taxation........................................... (6) (5)
Distributions receivable in respect of the year from
partnership interests..................................... (2) (59)
Dividends (including tax credits) from unlisted
associates................................................ (12) (11)
--- ----
RETAINED PROFIT/(LOSS) FOR THE YEAR......................... 41 (24)
=== ====
</TABLE>
The aggregate of Pearson's share in its associates, excluding the interest
in Lazard Partners Limited Partnership and the three Lazard Houses, is shown
below.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Sales....................................................... 299 239 225
Fixed assets................................................ 98 57 130
Current assets.............................................. 165 126 126
Liabilities due within one year............................. (105) (88) (101)
Liabilities due after one year or more...................... (73) (61) (80)
----- ----- -----
NET ASSETS.................................................. 85 34 75
===== ===== =====
</TABLE>
Pearson's interest in Lazard Partners Limited Partnership and the three
Lazard Houses for the year ended December 31, 1999 is shown below. On March 3,
2000, Pearson sold its interests in Lazards Partners Limited Partnership and the
three Lazard Houses (see note 31).
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Profit before tax........................................... 48 53 43
Taxation.................................................... (7) (7) (6)
Profit after taxation....................................... 41 46 37
Fixed assets................................................ 26 28 48
Current assets.............................................. 3,399 5,151 3,925
Liabilities due within one year............................. (2,819) (4,829) (3,753)
Liabilities due after one year or more...................... (457) (239) (97)
====== ====== ======
</TABLE>
------------------------------
Note:
Pearson's indirect general partnership interest in Lazard Freres et Cie and
Maison Lazard et Cie held directly and indirectly through Lazard Partners
Limited Partnership was an unlimited liability interest. Pearson held these
partnership interests through a subsidiary undertaking registered in England,
with no other material assets. The aggregate liabilities of these partnerships
included above are L511m (1998: L851m; 1997: L930m). Pearson also held direct
interests in Lazard Freres & Co., a New York Limited Liability Company.
F-26
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
13 ASSOCIATES (CONTINUED)
<TABLE>
<CAPTION>
COUNTRY OF BENEFICIAL CLASS
INCORPORATION INTEREST OF SHARE CAPITAL
OR REGISTRATION % SHARE MILLIONS
--------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST IN THE LAZARD HOUSES
Lazard Partners Limited Partnership............ US 50.0 Partnership
(which, with direct interest in the US and
French partnerships gives the following
interest in the Lazard Houses):
Lazard Brothers & Co. Ltd...................... England 29.1 Ord L1 25.3
Lazard Brothers & Co. Ltd...................... England 80.0 Def L1 5.0
Lazard Brothers & Co. Ltd...................... England 50.0 SFr 1 0.4
Lazard Freres & Co. "LLC"...................... US 11.5 LLC*
Lazard Freres et Cie/Maison Lazard et Cie...... France 9.2 Partnership
</TABLE>
------------------------------
*Limited Liability Company
Note:
The beneficial percentages held for the investment banking partnership interest
are interests in partnership profits.
14 OTHER FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
VALUATION BOOK VALUE VALUATION BOOK VALUE
--------- ----------- --------- -----------
LM LM LM LM
<S> <C> <C> <C> <C>
Listed..................................... 51 16 2 1
Unlisted................................... 83 83 331 167
--- -- --- ---
134 99 333 168
=== == === ===
</TABLE>
------------------------------
Note:
During the year the Group sold its interest in BSB Holdings Ltd for L408m which,
together with the disposal of an indirect interest in BSkyB for L30m, gave rise
to a profit on sale of L348m before tax estimated at L91m. If all investments
were realized at valuation there would be an estimated liability for taxation,
at year end rates, of L10m (1998: L49m).
F-27
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
14 OTHER FIXED ASSET INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
BSBH OTHER TOTAL
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
SUMMARY OF MOVEMENTS
At December 31, 1998........................................ 90 78 168
Exchange differences........................................ - (8) (8)
Additions................................................... - 24 24
Transfers................................................... - 2 2
Disposals................................................... (90) - (90)
Release of provisions for permanent diminution in value..... - 3 3
--- --- ---
BOOK VALUE AT DECEMBER 31, 1999............................. - 99 99
=== === ===
VALUATION AT DECEMBER 31, 1999.............................. - 134 134
=== === ===
</TABLE>
------------------------
Note:
The Pearson Employee Share Trust and Pearson plc Employee Share Ownership Trust
hold 953,057 (1998: 386,977) Pearson plc ordinary shares with a market value of
L19m at December 31, 1999 (1998: L5m) inclusive of accumulated scrip dividend
shares. Amounts included within other fixed asset investments for own shares are
L10m. In 1998, L2m was included in debtors.
<TABLE>
<CAPTION>
BSBH OTHER TOTAL
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
SUMMARY OF MOVEMENTS
At December 31, 1997........................................ 90 50 140
Exchange differences........................................ - 5 5
Additions................................................... - 53 53
Owned by businesses disposed................................ - (5) (5)
Disposals................................................... - (27) (27)
Release of provisions for permanent diminution in value..... - 2 2
--- --- ---
BOOK VALUE AT DECEMBER 31, 1998............................. 90 78 168
=== === ===
VALUATION AT DECEMBER 31, 1998.............................. 255 78 333
=== === ===
</TABLE>
15 STOCKS
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
Raw materials............................................... 35 32
Work in progress............................................ 159 126
Finished goods.............................................. 497 456
--- ---
691 614
=== ===
</TABLE>
------------------------
Note:
The replacement cost of stocks is not materially different from book value.
F-28
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
16 DEBTORS
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade debtors............................................... 807 763
Associates.................................................. 10 39
Other debtors............................................... 219 198
Prepayments and accrued income.............................. 82 105
----- -----
1,118 1,105
===== =====
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Other debtors............................................... 8 14
Prepayments and accrued income.............................. 6 8
----- -----
14 22
----- -----
1,132 1,127
===== =====
</TABLE>
17 CURRENT ASSET INVESTMENTS
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
VALUATION BOOK VALUE VALUATION BOOK VALUE
--------- ----------- --------- -----------
LM LM LM LM
<S> <C> <C> <C> <C>
Unlisted................................... 4 4 5 5
Businesses held for resale................. - - 148 148
--------- --------- --- ---
4 4 153 153
========= ========= === ===
</TABLE>
------------------------
Note:
Investments are at directors' valuations. If all investments were realized at
valuation there would be no liability for taxation.
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
SUMMARY OF MOVEMENTS
At December 31.............................................. 153 8
Exchange differences........................................ 5 -
Owned by businesses acquired (see note 25).................. 27 151
Disposals................................................... (181) (6)
---- ---
AT DECEMBER 31.............................................. (4) 153
==== ===
</TABLE>
F-29
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
18 CASH AT BANK AND IN HAND
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
GROUP COMPANY GROUP COMPANY
-------- ---------- -------- ----------
LM LM LM LM
<S> <C> <C> <C> <C>
Cash, bank current accounts and overnight
deposits.......................................... 288 - 305 -
Certificates of deposit and commercial paper........ 22 - 20 -
Term bank deposits.................................. 18 7 20 6
--- --------- --- ---------
328 7 345 6
=== ========= === =========
</TABLE>
19 FINANCIAL INSTRUMENTS
TREASURY POLICY
The Group holds financial instruments for two principal purposes: to finance
its operations and to manage the interest rate and currency risks arising from
its operations and its sources of finance. The Group finances its operations by
a mixture of cash flows from operations, short-term borrowings from banks and
commercial paper markets, and longer term loans from banks and capital markets.
The Group borrows principally in US dollars, euros and sterling, at both
floating and fixed rates of interest, using derivatives, where appropriate, to
generate the desired effective currency profile and interest rate basis. The
derivatives used for this purpose are principally interest rate swaps, interest
rate caps and collars, currency swaps and forward foreign exchange contracts.
The main risks arising from the Group's financial instruments are interest
rate risk, liquidity and refinancing risk, counterparty risk and foreign
currency risk. These risks are managed by the Group finance director under
policies approved by the board which are summarized below. These policies have
remained unchanged, except as disclosed, since the beginning of 1999. A treasury
committee of the board receives reports on the Group's treasury activities,
policies and procedures, which are reviewed periodically by a Group of external
professional advisers. The treasury department is not a profit center, and its
activities are subject to audit.
INTEREST RATE RISK
The Group's exposure to interest rate fluctuations on its borrowings is
managed by borrowing on a fixed rate basis and by entering into interest rate
swaps, interest rate caps and forward rate agreements. In September 1998 the
Group amended its policy objective to set a target proportion of its forecast
borrowings (taken at the year end, net of cash) to be hedged (i.e. fixed or
capped) over the next five years of 50% to 65% for the first two years, and 40%
to 60% for the next three years. At the end of 1999 that ratio was 58%. On a pro
forma basis, taking into account the disposal of the Group's interests in the
Lazard houses, that ratio was 74%. In view of this change to the debt portfolio,
the Group will manage this position in order to return to within the designated
policy. On that pro forma basis, a 1% change in the Group's variable rate US
dollar, euro and sterling interest rates would have a L4m effect on its profit
before tax.
LIQUIDITY AND REFINANCING RISK
The Group's objective is to procure continuity of funding at a reasonable
cost. To do this it seeks to arrange committed funding for a variety of
maturities from a diversity of sources. It has a
F-30
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
policy that the weighted average maturity of its core gross borrowings (treating
short-term advances as having the final maturity of the facilities available to
refinance them) should be between three and eight years, and that non-bank
sources should provide between 25% and 75% of such core gross borrowings.
Between July and November 1999 the Group issued [EURO]550m of bonds due 2004
and L250m of bonds due 2014. As a result, at the end of 1999 the average
maturity of gross borrowings was 5.1 years and non-banks provided 46% of them
(up from 4.4 years and 18% respectively at the beginning of the year). In
addition, in February 2000 the Group issued [EURO]650m of bonds due 2007. Taking
these as well as the Lazards disposal into account, on a pro forma basis the
average maturity was 5.8 years and the proportion provided by non-banks was 79%.
These pro forma adjustments to core gross borrowings result in the Group
exceeding its target range for finance provided by non-banks. Again we will
manage this position in order to return to within the designated policy. The
proceeds of each bond issue were used to repay part of the Group's syndicated
bank facility.
The Group believes that ready access to different funding markets also helps
to reduce its liquidity risk, and that published credit ratings and published
financial policies improve such access. The Group manages the amount of its net
debt and the level of its net interest cover, principally by the use of a target
range for net interest cover. All of the Group's credit ratings remained
unchanged during the year. The long-term ratings are Baa1 from Moody's and BBB+
from Standard & Poor's, and the short-term ratings are P2 and A2 respectively.
The Group continues to operate on the basis that the board will take such action
as necessary to support and protect its current credit ratings. The Group also
maintains undrawn committed borrowing facilities. At the end of 1999 these
amounted to L517m and their weighted average maturity was 2.5 years.
COUNTERPARTY RISK
The Group's risk of loss on deposits or derivative contracts with individual
banks is managed in part through the use of counterparty limits. These limits,
which take published credit limits (among other things) into account, are
approved by the Group finance director. In addition, since the year end, for
certain longer dated higher value derivative contracts the Group has entered
into mark to market agreements whose effect is to reduce significantly the
counterparty risk of the relevant transactions.
CURRENCY RISK
Although the Group is based in the UK, it has a significant investment in
overseas operations. The most significant currency for the Group is the US
dollar, followed by the euro and Sterling.
The Group's policy during the year on routine transactional conversions
between currencies (for example, the collection of receivable, and the
settlement of payables or interest) remained that these should be effected at
the relevant spot exchange rate. As in previous years, no unremitted profits
were hedged with foreign exchange contracts.
The Group decided in 1998 to align approximately the currency composition of
its core borrowings in US dollars, euros and sterling with the split between
those currencies of its forecast operating profit. This policy aims to dampen
the impact of changes in foreign exchange rates on
F-31
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
consolidated interest cover and earnings. Long-term core borrowing is now
limited to these three major currencies. However, the Group still borrows small
amounts in other currencies, typically for seasonal working capital needs.
At the year end the split of aggregate net borrowings in its three core
currencies was US dollar 80%, euro 9% and Sterling 11%. On a pro forma basis,
taking into account the Lazards disposal and the [EURO]650m bond issue, the
respective percentages were US dollar 76%, euro 15% and Sterling 9%.
Short-term debtors and creditors have been excluded from all the following
disclosures, other than currency risk disclosures.
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
GROUP COMPANY GROUP COMPANY
-------- ---------- -------- ----------
LM LM LM LM
<S> <C> <C> <C> <C>
MATURITY OF BORROWINGS
SHORT-TERM
Bank loans, overdrafts and commercial paper......... 47 130 72 172
----- ----- ----- -----
Total due within one year........................... 47 130 72 172
MEDIUM AND LONG TERM
Loans or installments thereof repayable:
From one to two years............................... 155 155 151 151
From two to five years.............................. 1,617 906 2,036 1,935
After five years not by installments................ 504 351 365 100
----- ----- ----- -----
Total due after more than one year.................. 2,276 1,412 2,552 2,186
----- ----- ----- -----
TOTAL BORROWINGS.................................... 2,323 1,542 2,624 2,358
===== ===== ===== =====
</TABLE>
------------------------------
Note:
In the absence of enforceable contracts from the relevant lenders to refinance
current advances as they fall due, at December 31, 1999 L547m (1998: L755m) of
debt currently classified from two to five years would be repayable within one
year. The short-term bank loans, overdrafts and commercial paper of the Group
are lower than those of the Company because of bank offset arrangements.
F-32
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
GROUP GROUP
GROUP OTHER GROUP OTHER
FINANCE FINANCIAL GROUP FINANCE FINANCIAL GROUP
LEASES LIABILITIES TOTAL LEASES LIABILITIES TOTAL
-------- ----------- --------- --------- ----------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
MATURITY OF OTHER FINANCIAL
LIABILITIES
Amounts falling due:
In one year or less or on demand...... 5 - 5 9 - 9
In more than one year but not more
than two years...................... 7 11 18 5 32 37
In more than two years but not more
than five years..................... 3 4 7 4 3 7
In more than five years............... - 1 1 1 - 1
--- --- --- --- --- ---
15 16 31 19 35 54
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
GROUP COMPANY GROUP COMPANY
-------- ---------- -------- ----------
LM LM LM LM
<S> <C> <C> <C> <C>
BORROWING BY INSTRUMENT
UNSECURED
10.75% Sterling Bonds 2002.......................... 100 - 100 -
9.5% Sterling Bonds 2004............................ 120 - 117 -
4.625% euro Bonds 2004.............................. 345 345 - -
10.5% Sterling Bonds 2008........................... 100 100 100 100
7% Sterling Bonds 2014.............................. 251 251 - -
7.125% US Dollar Notes 2006......................... 153 - 148 -
Bank loans and overdrafts and commercial paper...... 1,254 846 2,159 2,258
----- ----- ----- -----
TOTAL BORROWINGS.................................... 2,323 1,542 2,624 2,358
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
UNDRAWN COMMITTED BORROWING FACILITIES
Expiring within one year.................................... - -
Expiring between one and two years.......................... 155 3
Expiring in more than two years............................. 362 832
--- ---
517 835
=== ===
</TABLE>
------------------------
Note:
All of the above committed borrowing facilities incur commitment fees at market
rates.
F-33
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED PERIOD FOR
TOTAL TOTAL AVERAGE WHICH RATE
VARIABLE FIXED INTEREST IS FIXED-
BORROWINGS RATE RATE RATE YEARS
----------- -------- --------- --------- -----------
LM LM LM %
<S> <C> <C> <C> <C> <C>
CURRENCY AND INTEREST RATE RISK
PROFILE OF BORROWINGS
US dollar........................ 1,795 790 1,005 6.1 4.6
Sterling......................... 280 130 150 8.5 5.0
euro............................. 248 248 - - -
----- ----- ----- --- ---
2,323 1,168 1,155
===== ===== ===== === ===
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED PERIOD FOR
TOTAL TOTAL AVERAGE WHICH RATE
VARIABLE FIXED INTEREST IS FIXED-
BORROWINGS RATE RATE RATE YEARS
----------- -------- --------- --------- -----------
LM LM LM %
<S> <C> <C> <C> <C> <C>
CURRENCY AND INTEREST RATE RISK
PROFILE OF BORROWINGS
US dollar........................ 1,964 1,365 599 6.0 4.6
Sterling......................... 492 372 120 9.4 6.3
Spanish peseta................... 95 95 - - -
French franc..................... 62 62 - - -
Other currencies................. 11 11 - - -
----- ----- ----- --- ---
2,624 1,905 719
===== ===== ===== === ===
</TABLE>
------------------------
Note:
The figures shown in the tables above take into account interest rate and
currency swaps entered into by the Group. Variable rate borrowings bear interest
at rates based on relevant national LIBOR equivalents.
F-34
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1999
--------------------------------------
OTHER TOTAL
FINANCIAL TOTAL NO INTEREST
LIABILITIES FIXED RATE PAID
----------- ---------- -----------
LM LM LM
<S> <C> <C> <C>
CURRENCY AND INTEREST RATE RISK PROFILE OF OTHER
FINANCIAL LIABILITIES
US dollar................................................ 21 14 7
Sterling................................................. 9 - 9
Other currencies......................................... 1 1 -
-- -- --
31 15 16
== == ==
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------
TOTAL
OTHER TOTAL NO
FINANCIAL VARIABLE TOTAL INTEREST
LIABILITIES RATE FIXED RATE PAID
----------- -------- ---------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
CURRENCY AND INTEREST RATE RISK PROFILE OF OTHER
FINANCIAL LIABILITIES
US dollar......................................... 45 - 19 26
Sterling.......................................... 5 - - 5
Spanish peseta.................................... 2 2 - -
Other currencies.................................. 2 - - 2
-- --- -- --
54 2 19 33
== === == ==
</TABLE>
------------------------
Note:
Variable rate financial liabilities bear interest at rates based on relevant
national LIBOR equivalents.
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
NET FOREIGN MONETARY ASSETS/(LIABILITIES)
US DOLLAR STERLING EURO OTHER TOTAL
--------- -------- -------- -------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
CURRENCY EXPOSURES
FUNCTIONAL CURRENCY OF ENTITY:
US dollar........................................ - (4) 2 9 7
Sterling......................................... 21 - 6 14 41
Other currencies................................. 5 (3) - - 2
--- --- --- --- ---
26 (7) 8 23 50
=== === === === ===
</TABLE>
F-35
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
NET FOREIGN MONETARY ASSETS/(LIABILITIES)
FRENCH SPANISH
US DOLLAR STERLING FRANCS PESETA OTHER TOTAL
--------- -------- -------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
CURRENCY EXPOSURES
FUNCTIONAL CURRENCY OF ENTITY:
US dollar............................ - (133) 1 - 12 (120)
Sterling............................. 42 - 1 2 17 62
Spanish peseta....................... - (1) - - - (1)
Other currencies..................... (8) (8) - - - (16)
----- ----- -- -- -- ----
34 (142) 2 2 29 (75)
===== ===== == == == ====
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------------------
CASH AT SHORT- OTHER
BANK AND TERM FINANCIAL
IN HAND DEPOSITS ASSETS TOTAL
--------- ---------- --------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
CURRENCY AND INTEREST RATE RISK PROFILE OF
FINANCIAL ASSETS
US dollar.......................................... 183 7 1 191
Sterling........................................... 5 17 2 24
euro............................................... 61 14 1 76
Other currencies................................... 39 2 - 41
--- -- --------- ---
288 40 4 332
=== == ========= ===
Floating rate...................................... 221 1 - 222
Fixed rate......................................... 48 35 - 83
No interest paid................................... 19 4 4 27
--- -- --------- ---
288 40 4 332
=== == ========= ===
</TABLE>
------------------------
Note:
Floating rate cash and deposits earn interest based on relevant national LIBID
equivalents. Fixed rate cash and deposits earn interest at rates between 3% and
8.4%.
F-36
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
---------------------------------------------
CASH AT SHORT- OTHER
BANK AND TERM FINANCIAL
IN HAND DEPOSITS ASSETS TOTAL
--------- ---------- --------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
CURRENCY AND INTEREST RATE RISK PROFILE OF
FINANCIAL ASSETS
US dollar.......................................... 123 10 2 135
Sterling........................................... 32 17 - 49
Spanish peseta..................................... 67 - - 67
French franc....................................... 17 3 1 21
Other currencies................................... 66 10 1 77
--- -- --------- ---
305 40 4 349
=== == ========= ===
Floating rate...................................... 199 4 - 203
Fixed rate......................................... 89 36 - 125
No interest paid................................... 17 - 4 21
--- -- --------- ---
305 40 4 349
=== == ========= ===
</TABLE>
------------------------
Note:
Floating rate cash and deposits earn interest based on relevant national LIBID
equivalents. Fixed rate cash and deposits earn interest at rates between 3% and
7.5%.
F-37
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
----------- ---------- ----------- ----------
LM LM LM LM
<S> <C> <C> <C> <C>
PRIMARY FINANCIAL INSTRUMENTS HELD OR
ISSUED TO FINANCE THE GROUP'S OPERATIONS
Other financial assets.................... 4 4 4 4
Other financial liabilities............... (31) (31) (54) (54)
Cash at bank and in hand.................. 288 288 305 305
Short-term deposits....................... 40 40 40 40
Short-term borrowings..................... (47) (47) (72) (72)
Medium and long term borrowings........... (2,276) (2,307) (2,552) (2,635)
------ ------ ------ ------
DERIVATIVE FINANCIAL INSTRUMENTS HELD TO
MANAGE THE INTEREST RATE AND CURRENCY
PROFILE
Interest rate swaps....................... - 23 - (15)
Currency swaps............................ - 10 - 24
Foreign exchange swaps.................... - 1 - -
====== ====== ====== ======
</TABLE>
------------------------
Note:
Other financial assets, other financial liabilities, cash at bank and in hand,
short-term deposits and short term borrowings: the fair value approximates to
the carrying value due to the short maturity periods of these financial
instruments. Medium and long term borrowings: the fair value is based on market
values or, where these are not available, on the quoted market prices of
comparable debt issued by other companies. Interest rate swaps: the fair value
of interest rate swaps is based on market values. At December 31, 1999 the
notional principal value of these swaps was L1,818m (1998: L368m). Currency
swaps: the fair value of these contracts is based on market values. At
December 31, 1999 the Group had L473m (1998: L117m) of such contracts
outstanding.
F-38
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
19 FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
UNRECOGNIZED
-------------------------------
TOTAL NET
GAINS/ DEFERRED
GAINS LOSSES (LOSSES) GAINS
-------- -------- --------- ---------
LM LM LM LM
<S> <C> <C> <C> <C>
GAINS AND LOSSES ON HEDGES AT DECEMBER 31, 1998...... 50 (41) 9 7
Gains and losses arising in previous years that were
recognized in 1999................................. (2) - (2) (3)
---- --- --- ---------
GAINS AND LOSSES ARISING BEFORE DECEMBER 31, 1998
THAT WERE NOT RECOGNIZED IN 1999................... 48 (41) 7 4
Gains and losses arising in 1999 that were not
recognized in 1999................................. 3 24 27 -
---- --- --- ---------
UNRECOGNIZED GAINS AND LOSSES ON HEDGES AT DECEMBER
31, 1999........................................... 51 (17) 34 4
---- --- --- ---------
Of which: Gains & losses expected to be recognized in
2000............................................... 2 (1) 1 3
Gains & losses expected to be recognized in 2001 or
later.............................................. 49 (16) 33 1
==== === === =========
</TABLE>
F-39
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
20 OTHER CREDITORS
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade creditors............................................. 473 371
Taxation.................................................... 294 299
Social security and other taxes............................. 28 33
Other creditors............................................. 74 101
Accruals and deferred income................................ 482 388
Obligations under finance leases............................ 5 9
Dividends................................................... 85 81
----- -----
1,441 1,282
===== =====
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Trade creditors............................................. 2 21
Other creditors............................................. 10 7
Accruals and deferred income................................ 10 16
Obligations under finance leases............................ 10 10
----- -----
32 54
===== =====
</TABLE>
------------------------
Note:
Accruals and deferred income includes L4m (1998: L7m) relating to the
unamortized profit arising out of the unwinding of a sterling interest rate swap
in 1994. The swap was arranged in 1992 in connection with the issue of L100m
10.75% Sterling Bonds 2002. The profit is being amortized over the remaining
life of the bonds. L1m (1998: L5m) is due after one year. None of the amount
falls due after five years.
F-40
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
21 DEFERRED TAXATION
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
SUMMARY OF MOVEMENTS
At December 31.............................................. 20 37
Exchange differences........................................ (3) 1
Subsidiary undertakings acquired/(disposed)................. (2) (14)
Net charge/(release) in the year............................ 6 (3)
Transfer to current taxation................................ - (1)
-- ---
AT DECEMBER 31.............................................. 21 20
== ===
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
DEFERRED TAXATION DERIVES FROM
Capital allowances.......................................... 1 7
Taxation on unremitted overseas earnings.................... 18 15
Other timing differences.................................... 2 (2)
-- --
21 20
== ==
DEFERRED TAXATION NOT PROVIDED
Relating to revalued assets and timing differences.......... 4 (1)
Relating to gains subject to roll-over relief............... 1 2
-- --
5 1
== ==
</TABLE>
------------------------
Note:
The Group has calculated deferred tax not provided on rolled over gains in 1999
taking into account the indexation allowance which would be deductible on a
disposal of the asset into which the gain was rolled. 1998 has been restated on
this basis.
F-41
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
22 OTHER PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
1999
----------------------------------
POST-
RETIREMENT OTHER TOTAL
------------ -------- --------
LM LM LM
<S> <C> <C> <C>
At December 31, 1998........................................ 100 153 253
Exchange differences........................................ 2 3 5
Subsidiary undertakings acquired/disposed................... (12) (3) (15)
Deferred consideration arising on acquisitions.............. - 4 4
Transfers................................................... - 1 1
Released.................................................... (1) (9) (10)
Provided.................................................... 27 24 51
Utilized.................................................... (21) (62) (83)
--- --- ---
AT DECEMBER 31, 1999........................................ 95 111 206
=== === ===
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------
POST-
RETIREMENT OTHER TOTAL
------------ -------- --------
LM LM LM
<S> <C> <C> <C>
At December 31, 1997........................................ 34 141 175
Exchange differences........................................ - (1) (1)
Subsidiary undertakings acquired/disposed................... 63 31 94
Deferred consideration arising on acquisitions.............. - 1 1
Transfers................................................... - 7 7
Released.................................................... (1) (1) (2)
Provided.................................................... 14 47 61
Utilised.................................................... (10) (72) (82)
--- --- ---
AT DECEMBER 31, 1998........................................ 100 153 253
=== === ===
</TABLE>
--------------------------
Note:
Post-retirement provisions, based on actuarial assumptions, are in respect of
pensions, L35m (1998: L30m) and post-retirement medical benefits, L60m (1998:
L70m). Other provisions are mainly in respect of:
a. Deferred consideration relating to the purchase of subsidiary and associated
undertakings, L29m (1998: L34m). During the year L9m was utilized. Included
within the year end balance is L10m which relates to the purchase of All
American Communications in 1997, the utilization of which is dependent upon
the performance of certain television shows over the next year.
b. Litigation, L12m (1998: L12m). During the year L6m has been utilized, L4m
released, L3m provided in respect of the Simon & Schuster acquisition, and
L6m provided in respect of warranty and legal claims, the amount and timings
of the settlement of which is unknown.
c. Reorganization and redundancies, L27m (1998: L51m). During the year L3m has
been released, L10m provided and L33m utilized mainly in respect of the
integration of Simon & Schuster following its acquisition in 1998. The
balance is expected to be utilized in the year ended December 31 2000 and is
based on current reorganization plans.
d. Lease commitments, L27m (1998: L35m). These relate primarily to onerous
lease contracts, acquired as part of the purchase of subsidiary
undertakings, which have expiry dates up to 2010. The provision is based on
current occupancy estimates and it has been assumed that the properties will
not be sub-let. During the year L3m has been utilized, L4m charged and L2m
removed through disposals.
e. Disposals and closures, L3m (1998: L6m). During the year L2m has been
utilized in respect of a number of closures which are anticipated to be
completed during the year ended December 31, 2000.
f. Other, L13m (1998: L15m). During the year the balance was reduced by L6m in
respect of Simon & Schuster acquisition and L4m provided. The balance, which
relates to a number of small items, is expected to be utilized over varying
time periods.
F-42
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
23 SHARE CAPITAL
<TABLE>
<CAPTION>
1999
-------------------
NUMBER
-------- --------
('000) LM
<S> <C> <C>
AUTHORIZED
Ordinary shares of 25p each................................. 894,000 212
------- ---
AT DECEMBER 31, 1999........................................ 894,000 212
======= ===
CALLED UP, ALLOTTED AND FULLY PAID
Ordinary shares of 25p at December 31, 1998................. 609,555 152
Issued under share option and employee share schemes........ 3,115 1
------- ---
AT DECEMBER 31, 1999........................................ 612,670 153
======= ===
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------
NUMBER
-------- --------
('000) LM
<S> <C> <C>
AUTHORIZED
Ordinary shares of 25p each................................. 846,000 212
------- ---
AT DECEMBER 31, 1998........................................ 846,000 212
======= ===
CALLED UP, ALLOTTED AND FULLY PAID
Ordinary shares of 25p at December 31, 1997................. 576,772 144
Issued under share option and employee share schemes........ 3,611 1
Issued under scrip dividend scheme.......................... 292 -
Issued under placing........................................ 28,880 7
------- ---
AT DECEMBER 31, 1998........................................ 609,555 152
======= ===
</TABLE>
------------------------
Note:
The ordinary shares referred to above, as defined in the memorandum and articles
of association of the Company, are equivalent to equity shares as defined by FRS
4. The consideration received in respect of shares issued during the year was
L18m (1998: L347m). Options granted under certain of the Company's employee
share option schemes were adjusted following the demerger of Royal Doulton plc.
In the case of those "Save for Share" and executive share options which were not
adjustable, compensation is to take the form of additional Pearson shares
distributed from an employee share trust when the options are exercised. If all
these options are exercised the maximum amount of equity shares to be issued is
estimated at 1,814 under the Save for Shares scheme and 15,073 under the
executive schemes. Shares issued include Lnil (1998: L3m) under the scrip
dividend plan.
F-43
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
23 SHARE CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF ORIGINAL
WHEN SHARES SUBSCRIPTION EXERCISE
GRANTED ('000) PRICE (P) PERIOD
-------- ---------- ------------------ ----------------
<S> <C> <C> <C> <C>
OPTIONS OUTSTANDING AT DECEMBER 31, 1999
Worldwide Save for Shares plans................ 1992 39 242 1997-2000
1994 100 509 1999-2002
1995 429 436 2000-2003
1996 335 578 2001-2004
1997 422 593 2000-2005
1998 1,225 769 2000-2006
1999 1,416 1,022-1,086 2001-2007
------
3,966
======
Executive share option plans................... 1990 148 307-334 1993-2000
1991 59 364-377 1994-2001
1992 100 327-379 1995-2002
1993 125 396 1996-2003
1994 265 635 1997-2004
1995 438 545 1998-2005
1996 999 654-682 1999-2006
1997 2,410 744-757 2000-2007
1998 2,971 948-1,090 2001-2008
1999 3,479 1,210-1,285 2002-2009
------
10,994
======
OPTIONS OUTSTANDING AT DECEMBER 31, 1998
Worldwide Save for Shares plans................ 1991 64 299 1996-1999
1992 268 242 1997-2000
1994 478 509 1999-2002
1995 583 436 2000-2003
1996 455 578 2001-2004
1997 601 593 2000-2005
1998 1,674 769 2000-2006
------
4,123
======
Executive share option plans................... 1989 10 376 1992-1999
1990 231 307-334 1993-2000
1991 59 364-377 1994-2001
1992 275 327-379 1995-2002
1993 125 396 1996-2003
1994 460 635 1997-2004
1995 658 545 1998-2005
1996 1,316 654-682 1999-2006
1997 2,605 744-757 2000-2007
1998 3,167 948-1,090 2001-2008
------ ------ ------------------ ----------------
8,906
======
</TABLE>
--------------------------
Note:
The subscription prices have been rounded down to the nearest whole penny.
F-44
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
24 RESERVES
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------
SHARE PROFIT
PREMIUM REVALUATION OTHER AND LOSS
ACCOUNT RESERVE RESERVES ACCOUNT TOTAL
--------- ------------ --------- --------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
SUMMARY OF MOVEMENTS
At December 31, 1998................... 498 1 1 396 896
Exchange differences................... - (1) (1) 38 36
Premium on issue of 3m equity shares... 19 - - (2) 17
Goodwill written back (see note 26).... - - - 63 63
Profit retained for the year........... - - - 156 156
--- -- -- --- -----
AT DECEMBER 31, 1999................... 517 - - 651 1,168
=== == == === =====
ANALYZED AS:
Partnerships and other associates...... - - - 43 43
Group excluding partnerships and other
associates........................... 517 - - 608 1,125
=== == == === =====
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
SHARE PROFIT
PREMIUM REVALUATION OTHER AND LOSS
ACCOUNT RESERVE RESERVES ACCOUNT TOTAL
--------- ------------ --------- ---------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
SUMMARY OF MOVEMENTS
At December 31, 1997.................. 158 3 1 (154) 8
Exchange differences.................. - - - (8) (8)
Premium on issue of 33m equity
shares.............................. 340 - - (1) 339
Goodwill arising...................... - - - (16) (16)
Goodwill written back................. - - - 262 262
Realization of revaluation reserve.... - (2) - 2 -
Profit retained for the year.......... - - - 311 311
--- -------- -------- ---- ---
AT DECEMBER 31, 1998.................. 498 1 1 396 896
=== ======== ======== ==== ===
ANALYZED AS:
Partnerships and other associates..... - - 1 2 3
Group excluding partnerships and other
associates.......................... 498 1 - 394 893
=== ======== ======== ==== ===
</TABLE>
------------------------
Note:
Cumulative goodwill relating to acquisitions made prior to 1998, which was
deducted from reserves, amounts to L1,870m (1998: L1,912m). During the year L7m
(1998: Lnil) of impaired goodwill was written off through the profit and loss
account. During 1999 Pearson plc received L20m (1998: L17m) on the issue of
shares in respect of the exercise of options awarded under various share option
plans. Employees paid L18m (1998: L16m) to the Group for the issue of these
shares and the balance of L2m (1998: L1m) comprised contributions to the
qualifying employee share ownership trust (QUEST) from subsidiary undertakings.
F-45
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
25 ACQUISITIONS
In November 1998 the Group acquired the education, reference and business &
professional publishing divisions of Simon & Schuster Inc. All acquisitions have
been consolidated applying acquisition accounting principles.
<TABLE>
<CAPTION>
1999 1998
-------- -------------------------------
SIMON &
TOTAL SCHUSTER OTHER TOTAL
-------- --------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
ACQUISITION ANALYSIS OF SUBSIDIARIES AND BUSINESSES
Tangible fixed assets................................... (4) 126 17 143
Stocks.................................................. (2) 299 - 299
Debtors................................................. 9 306 5 311
Current asset investments............................... 27 151 - 151
Creditors............................................... (20) (236) (22) (258)
Provisions.............................................. 10 (86) - (86)
Deferred taxation....................................... 1 (1) 2 1
Equity minority interests............................... 32 - 2 2
Net borrowing acquired.................................. - (3) 1 (2)
---- ------ --- ------
Net assets acquired at fair value....................... 53 556 5 561
---- ------ --- ------
Fair value of consideration:
Cash.................................................... (267) (2,865) (53) (2,918)
Deferred cash consideration............................. (4) - 1 1
Costs accrued........................................... (2) (3) (1) (4)
Net prior year adjustments.............................. 33 - (4) (4)
---- ------ --- ------
Total consideration..................................... (240) (2,868) (57) (2,925)
---- ------ --- ------
GOODWILL ARISING........................................ 187 2,312 52 2,364
==== ====== === ======
Analyzed as:
Goodwill capitalized.................................... 187 2,312 36 2,348
Goodwill written off to reserves........................ - - 16 16
---- ------ --- ------
187 2,312 52 2,364
==== ====== === ======
</TABLE>
------------------------
Note:
Goodwill written off to reserves relates to acquisitions made before January 1,
1998. 1999 includes final fair value adjustments in respect of Simon & Schuster
which was acquired in 1998 (see page F-47).
F-46
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
25 ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
-------- -------------------------------
SIMON &
TOTAL SCHUSTER OTHER TOTAL
-------- --------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
ACQUISITION GOODWILL AND FAIR VALUES
Acquisition cost........................................... 240 2,868 57 2,925
--- ----- --- -----
Book value of net assets acquired.......................... 37 569 15 584
Simon & Schuster final fair value adjustments (see
below)................................................... 22 - - -
Other fair value of adjustments............................ (6) (13) (10) (23)
--- ----- --- -----
Fair value to the Group.................................... 53 556 5 561
--- ----- --- -----
GOODWILL ARISING........................................... 187 2,312 52 2,364
=== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
PROVISIONAL FINAL
FAIR VALUE OTHER FAIR VALUE
DEC 31, 1998 REVALUATIONS ITEMS DEC 31, 1999
------------- ------------- -------- -------------
LM LM LM LM
<S> <C> <C> <C> <C>
SIMON & SCHUSTER
Tangible fixed assets................... 126 (5) - 121
Stocks.................................. 299 (12) a 6 293
Debtors................................. 306 (12) b 9 303
Current asset investments............... 151 - 27 178
Creditors............................... (236) 6 c (7) (237)
Provisions.............................. (86) 10 d - (76)
Deferred tax............................ (1) - - (1)
Net borrowing........................... (3) - - (3)
---- ----- -- ----
NET ASSETS ACQUIRED..................... 556 (13) 35 578
==== ===== == ====
</TABLE>
------------------------
Note:
Simon & Schuster was acquired at the end of 1998 and provisional fair value
adjustments were made in the 1998 accounts. Final fair value adjustments have
been made in 1999.
REVALUATIONS
a. In respect of obsolete product L6m of acquired finished goods and work in
progress has been written off. Pre-publication expenditure has been reduced
by L2m to its net realizable value.
b. Debtors have been reduced by L12m to bring them to their net realizable
value. This is to increase the reserve for returns in view of actual returns
experienced in 1999 in respect of pre-acquisition sales. Further provision
has been made for debts acquired which could not be collected.
c. Certain excess accruals included in the acquisition balance sheet, no longer
required, have been released.
F-47
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
25 ACQUISITIONS (CONTINUED)
d. Acquired pension and post-retirement medical benefit obligations have been
reduced by L22m following actuarial valuations performed during the year.
Further contractual pension liabilities of L6m have been accrued.
OTHER ITEMS
Other items relate to the businesses of Simon & Schuster that Pearson held
for resale. These businesses were included in current asset investments at the
anticipated net proceeds from sale. During 1999 these businesses, except
Prentice Hall Direct, were sold with net proceeds exceeding the original
estimate. The net assets of Prentice Hall Direct have been reinstated in the
balance sheet.
SIMON & SCHUSTER IMPAIRMENT REVIEW
An initial impairment review has been carried out in 1999 in respect of
Simon & Schuster, following its acquisition in November 1998, which compared the
post-acquisition performance of the business with the pre-acquisition forecasts
used to support the purchase price. This review indicated that the
post-acquisition performance had met the pre-acquisition expectations. As such
there has been no impairment of goodwill.
<TABLE>
<CAPTION>
1999
----------------------------------
NET ASSETS
COST ACQUIRED GOODWILL
-------- ----------- ---------
LM LM LM
<S> <C> <C> <C>
TOTAL GOODWILL ARISING ON ACQUISITIONS
Subsidiaries and businesses (see page F-46)................. 240 53 187
Associates.................................................. 54 25 29
--- -- ---
294 78 216
=== == ===
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------
NET ASSETS
COST ACQUIRED GOODWILL
-------- ----------- ---------
LM LM LM
<S> <C> <C> <C>
TOTAL GOODWILL ARISING ON ACQUISITIONS
Subsidiaries and businesses (see page F-46)................. 2,925 561 2,364
Associates.................................................. 13 13 -
----- --- -----
2,938 574 2,364
===== === =====
</TABLE>
F-48
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
25 ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
CASH FLOW FROM ACQUISITIONS
Cash-current year acquisitions (see page F-46).............. 267 2,918 252
Deferred payments for prior year acquisitions and other
items..................................................... (18) 18 17
--- ----- ---
Net cash outflow............................................ 249 2,936 269
=== ===== ===
</TABLE>
------------------------
Note:
Contributions to the cash flow from acquisitions in 1999 are as follows: net
cash inflow from operating activities L1m (1998: L15m; 1997:L1m), returns on
investments and servicing of finance Lnil (1998: L(1)m; 1997: L(1)m), taxation
Lnil (1998: L(1)m; 1997: Lnil) and capital expenditure and financial investment
Lnil (1998: L(7)m; 1997: Lnil).
26 DISPOSALS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
TOTAL TOTAL TOTAL
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
DISPOSAL ANALYSIS OF SUBSIDIARIES AND BUSINESSES
Intangible assets........................................... (1) - -
Tangible fixed assets....................................... (14) (203) (4)
Investments................................................. - (5) -
Associates.................................................. - (6) -
Stocks...................................................... (4) (16) (12)
Debtors..................................................... (20) (66) (14)
Creditors and taxation...................................... 22 84 3
Provisions.................................................. 5 (8) (3)
Deferred taxation........................................... 1 13 (1)
Equity minority interest.................................... - (30) 1
Net cash.................................................... (3) (11) (1)
--- ---- ---
Net assets disposed of...................................... (14) (248) (31)
--- ---- ---
Proceeds received........................................... 57 762 62
Deferred consideration...................................... - 2 3
Costs....................................................... (19) (42) (4)
Net prior year adjustments.................................. (5) - (1)
--- ---- ---
Profit on sale.............................................. 19 474 29
--- ---- ---
Goodwill written back....................................... (63) (245) (9)
--- ---- ---
NET (LOSS)/PROFIT ON SALE................................... (44) 229 20
=== ==== ===
</TABLE>
------------------------
Note:
During 1999 the Group sold its Extel research products business for L19m giving
rise to a loss of L19m.
During 1998 the Group sold Mindscape Inc. for L91m giving rise to a profit of
L59m, Pearson New Entertainment business for L125m with a profit of L121m and
The Tussauds Group for L352m generating a profit of L171m.
During 1997 the Group sold Churchill Livingstone for L57m with a profit of L30m.
F-49
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
26 DISPOSALS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
TOTAL GOODWILL WRITTEN BACK ON DISPOSAL
On disposal of subsidiaries................................. 63 245 221
On disposal of associates................................... - 16 11
On disposal by associates................................... - 1 1
-- --- ---
63 262 233
== === ===
CASH FLOW FROM DISPOSALS
Cash-current year disposals (see page F-50)................. 57 762 62
Costs paid.................................................. (9) (38) (3)
Deferred receipts and payments from prior year disposals and
other amounts............................................. (4) (6) (5)
-- --- ---
NET CASH INFLOW............................................. 44 718 54
== === ===
</TABLE>
------------------------
Note:
Contributions to the cash flow from disposals in 1999 are as follows: net cash
inflow from operating activities L4m (1998: L45m; 1997: L1m), returns on
investment and servicing of finance Lnil (1998: L(3)m; 1997: L(1)m), taxation
Lnil (1998: L(11)m; 1997: Lnil) and capital expenditure and financial investment
Lnil (1998: L(14)m; 1997: Lnil).
F-50
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
27 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
CON- DISCON- CON- DISCON- CON- DISCON-
TINUING TINUED TOTAL TINUING TINUED TOTAL TINUING TINUED TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
LM LM LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A) RECONCILIATION OF OPERATING
PROFIT TO NET CASH INFLOW
FROM OPERATING ACTIVITIES
Operating profit--total........ 270 48 318 187 63 250 252 76 328
Share of profit of partnerships
and other associates......... (23) (48) (71) (11) (40) (51) - (47) (47)
Depreciation charges........... 82 - 82 54 12 66 49 16 65
Goodwill amortization.......... 130 - 130 12 - 12 - - -
(Increase)/decrease in
stocks....................... (57) - (57) 43 1 44 7 (2) 5
(Increase) in debtors.......... (71) - (71) (67) 5 (62) (131) (8) (139)
Increase/(decrease) in
creditors.................... 127 - 127 113 - 113 (8) 4 (4)
(Decrease)/increase in
operating provisions......... (33) - (33) 2 - 2 (3) (1) (4)
Other and non-cash items....... 8 - 8 28 - 28 (1) 1 -
---- --- ---- ---- --- ---- ---- --- ----
NET CASH INFLOW FROM OPERATING
ACTIVITIES*.................. 433 - 433 361 41 402 165 39 204
==== === ==== ==== === ==== ==== === ====
Purchase of fixed assets and
finance leases............... (113) - (113) (113) (13) (126) (93) (18) (111)
Sale of operating tangible
fixed assets................. 24 - 24 12 1 13 14 - 14
Dividends from partnerships and
other associates............. 12 32 44 12 41 53 13 27 40
Other.......................... 8 - 8 25 2 27 10 2 12
---- --- ---- ---- --- ---- ---- --- ----
OPERATING CASH FLOW............ 364 32 396 297 72 369 109 50 159
==== === ==== ==== === ==== ==== === ====
</TABLE>
------------------------
*Net cash inflow from 1999 includes a L54m (1998: L7m; 1997: L9m) outflow
relating to exceptional items charged in 1999 and a L36m (1998: L14m; 1997:
L11m) outflow relating to exceptional items charged in prior years.
F-51
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
27 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
DEBT DUE DEBT
SHORT- WITHIN DUE
TERM ONE AFTER ONE FINANCE
CASH OVERDRAFTS SUB-TOTAL DEPOSITS YEAR YEAR LEASES TOTAL
-------- ---------- --------- -------- -------- --------- -------- --------
LM LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B) ANALYSIS OF NET DEBT
At December 31, 1998...... 305 (67) 238 40 (5) (2,552) (19) (2,298)
Exchange differences...... (23) 3 (20) 1 - (30) (1) (50)
Disposed with
subsidiary*............. - - - - - - 1 1
Debt issue costs.......... - - - - - 5 - 5
Other non-cash items...... - - - - - (5) (7) (12)
Net cash flow............. 6 26 32 (1) (4) 306 11 344
--- --- --- --- ---- ------ --- ------
AT DECEMBER 31, 1999...... 288 (38) 250 40 (9) (2,276) (15) (2,010)
=== === === === ==== ====== === ======
At December 31, 1997...... 144 (23) 121 71 (290) (609) (1) (708)
Exchange differences...... (30) 1 (29) 14 - 10 - (5)
Acquired with
subsidiary*............. - - - - - - (19) (19)
Disposed with
subsidiary*............. - - - - 5 1 - 6
Debt issue costs.......... - - - - - 21 - 21
Other non-cash items...... - - - - - (1) - (1)
Net cash flow............. 191 (45) 146 (45) 280 (1,974) 1 (1,592)
--- --- --- --- ---- ------ --- ------
AT DECEMBER 31, 1998...... 305 (67) 238 40 (5) (2,552) (19) (2,298)
=== === === === ==== ====== === ======
At December 31, 1996...... 139 (69) 70 160 (105) (555) (2) (432)
Exchange differences...... (8) (11) (19) - - (3) - (22)
Acquired with
subsidiary*............. - - - - (54) (66) - (120)
Transfers................. - - - - (8) 8 - -
Net cash flow............. 13 57 70 (89) (123) 7 1 (134)
--- --- --- --- ---- ------ --- ------
AT DECEMBER 31, 1997...... 144 (23) 121 71 (290) (609) (1) (708)
=== === === === ==== ====== === ======
</TABLE>
------------------------
*Excluding cash and overdrafts
Note:
Finance leases are included within other creditors in the balance sheet (see
note 20).
F-52
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
27 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
C) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Decrease in net debt from net cash flow..................... 32 146 70
(Increase) in net debt from management of liquid
resources................................................. (1) (45) (89)
Decrease/(increase) in net debt from other borrowings....... 302 (1,694) (116)
Decrease in finance leases.................................. 11 1 1
Acquired with subsidiary.................................... - (19) (120)
Disposed with subsidiary.................................... 1 6 -
Debt issue costs............................................ 5 21 -
Other non-cash items........................................ (12) (1) -
Exchange differences........................................ (50) (5) (22)
------ ------ ----
Movement in net debt in the year............................ 288 (1,590) (276)
Net debt at beginning of year............................... (2,298) (708) (432)
------ ------ ----
NET DEBT AT END OF YEAR..................................... (2,010) (2,298) (708)
====== ====== ====
</TABLE>
TAX PAID
Includes L100m (1998: L3m; 1997: L4m of credits) relating to items excluded
from operating profit.
28 COMMITMENTS UNDER LEASES
At December 31, 1999, the Group had commitments under leases other than
finance leases, to make payments in 2000 as follows:
<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHER
--------- --------
LM LM
<S> <C> <C>
FOR LEASES EXPIRING:
In 2000..................................................... 6 3
Between 2001 and 2004....................................... 17 19
Thereafter.................................................. 40 5
-- --
63 27
== ==
</TABLE>
At December 31, 1998, the Group had commitments under leases other than
finance leases, to make payments in 1999 as follows:
<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHER
--------- --------
LM LM
<S> <C> <C>
FOR LEASES EXPIRING:
In 1999..................................................... 6 2
Between 2000 and 2003....................................... 25 18
Thereafter.................................................. 32 6
-- --
63 26
== ==
</TABLE>
F-53
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
29 CONTINGENT LIABILITIES
There are contingent Group and Company liabilities in respect of
indemnities, warranties and guarantees in relation to former subsidiary
undertakings and in respect of guarantees in relation to subsidiaries and
associates. In addition there are contingent liabilities of the Group in respect
of legal claims and general partnership interests (see note 13). None of these
claims is expected to result in a material gain or loss to the Group.
30 RELATED PARTIES
ASSOCIATES
Loans and equity advanced to associates during the year and at the balance
sheet date are shown in note 13. Amounts falling due from partnerships and other
associates are set out in note 16. Dividends receivable from partnerships and
other associates are set out in note 13. Details of individually significant
transactions are shown below.
CHANNEL 5 TELEVISION GROUP LTD
The Group has a 24% economic interest in the equity of Channel 5 Television
Group Ltd.
During the year the Group provided L31m (1998: L24m) of programming to
Channel 5 Broadcasting Ltd, a wholly owned subsidiary of Channel 5 Television
Group Ltd, and undertook transmission to the value of L3m (1998: L2m) for
Channel 5 Engineering Services Ltd, a subsidiary of Channel 5 Television
Group Ltd. At December 31, 1999 L6m was outstanding (1998: L6m). During the year
the Group paid L4m (1998: L6m) for L20m consortium relief (1998: L29m).
UK TV
The Group has a 20% interest in UK TV. During the year the Group provided
programs and services to the value of Lnil (1998: L1m).
GRUNDY ASSOCIATES
During the year the Group received L3m (1998: L3m) for management fees,
format rights and royalties from a number of associates of Grundy
Worldwide Ltd, of which L2m (1998: Lnil) was outstanding at the year end. No
individual transactions were material to the Group.
MAGYAR-RTL
The Group has a 20% interest in Magyar-RTL.
During the year the Group provided programs and services to the value of L1m
(1998: L1m) none of which was outstanding at the year end (1998: Lnil).
LAZARD PARTNERSHIP
Details of the ownership structure and profit sharing arrangements are set
out in Note 13.
The Group periodically places funds on deposit with the Lazard Houses. The
investments are made on an arm's length basis and no transactions are
individually material in the context of the
F-54
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
30 RELATED PARTIES (CONTINUED)
Group treasury transactions. The Group also uses the Lazard Houses to provide
professional advice. Fees for such services for the year to December 31, 1999
totalled L1m (1998: L5m).
EUROPEAN CHANNEL MANAGEMENT LTD
During 1998 the Group sold its 45% interest in European Channel
Management Ltd. During 1998 the Group paid L1m for L6m of tax losses. There were
no transactions during 1999.
OTHER
There were no transactions with directors and officers of the Company.
31 POST BALANCE SHEET EVENTS
On January 26, 2000 Pearson placed 11,500,000 ordinary shares to raise
approximately L250m, after expenses, to fund its existing and new internet
related businesses and on February 1, 2000 Pearson issued [EURO]650,000,000
Bonds due 2007, the proceeds of which were used to repay existing bank debt.
On February 15, 2000 Pearson increased its economic interest in Channel 5
Television Group Ltd, the UK terrestrial broadcaster, from 24% to 29.25% at a
cost of L51m.
On February 29, 2000 the merger of Pearson's asset valuation business with
the Data Broadcasting Corporation, announced in November 1999, was completed.
On March 3, 2000 the sale of Pearson's interests in the three Lazard houses,
announced in June 1999, was completed with proceeds totalling L436m.
On March 31, 2000 Pearson announced that it had made a recommended cash
offer of approximately L311m for Dorling Kindersley Holdings plc, the world-wide
illustrated reference publisher. This offer went unconditional on May 9, 2000.
On April 7, 2000 Pearson announced the merger of Pearson Television with
CLT-UFA, Europe's largest broadcaster, whereby following the completion of the
transaction Pearson will own 22% of the enlarged company.
F-55
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
32 COMPANY BALANCE SHEET AS AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
NOTE -------- --------
LM LM
<S> <C> <C> <C>
FIXED ASSETS
Investments:
Subsidiaries................................................ 33 2,401 2,598
Own shares held............................................. 33 8 -
------ ------
2,409 2,598
------ ------
CURRENT ASSETS
Debtors:
Subsidiaries--due within one year........................... 2,233 2,774
Subsidiaries--due after more than one year.................. 1,403 1,268
Other debtors............................................... 6 8
Prepayments and accrued income.............................. 1 10
Cash at bank and in hand.................................... 18 7 6
------ ------
3,650 4,066
------ ------
CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR
Short-term borrowing........................................ 19 (130) (172)
Subsidiaries................................................ (1,844) (2,082)
Taxation.................................................... (20) (5)
Other creditors............................................. (4) -
Accruals and deferred income................................ 33 (30) (28)
Dividends................................................... (85) (79)
------ ------
(2,113) (2,366)
------ ------
NET CURRENT ASSETS.......................................... 1,537 1,700
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 3,946 4,298
CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Medium and long term borrowings............................. 19 (1,412) (2,186)
Subsidiaries................................................ (280) (225)
Accruals and deferred income................................ 33 (3) (5)
PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation........................................... 33 (1) (1)
Other provisions for liabilities and charges................ (2) (2)
------ ------
(1,698) (2,419)
------ ------
NET ASSETS.................................................. 2,248 1,879
====== ======
CAPITAL AND RESERVES
Called up share capital..................................... 23 153 152
Share premium account....................................... 33 517 498
Special reserve............................................. 33 397 397
Other reserves.............................................. 33 50 50
Profit and loss account..................................... 33 1,131 782
------ ------
EQUITY SHAREHOLDERS' FUNDS.................................. 2,248 1,879
====== ======
</TABLE>
F-56
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
33 NOTES TO THE COMPANY BALANCE SHEET
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
TANGIBLE FIXED ASSETS (LEASEHOLD PROPERTY)
Cost........................................................ 1 1
Depreciation................................................ (1) (1)
-- --
NET BOOK VALUE.............................................. - -
== ==
</TABLE>
------------------------
Note:
There were no capital commitments for fixed assets at December 31, 1999 or
December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
INVESTMENT IN SUBSIDIARIES
At December 31.............................................. 2,598 1,963
Acquisition from subsidiaries............................... - 22
Subscription for additional share capital in subsidiaries... 3 700
Disposals................................................... (195) (89)
Revaluations................................................ (5) 2
----- -----
AT DECEMBER 31.............................................. 2,401 2,598
===== =====
</TABLE>
------------------------
Note:
Shares are stated at cost less provisions for diminution in value or directors'
valuations.
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
DEFERRED TAXATION
At December 31.............................................. (1) -
Charged in the year......................................... - (1)
-- --
AT DECEMBER 31.............................................. (1) (1)
== ==
</TABLE>
------------------------
Note:
Deferred taxation derives from other timing differences.
OWN SHARES HELD
Amounts included within own shares relate to Pearson plc ordinary shares
held in respect of the Pearson Employee Share Trust and Pearson plc Employee
Share Ownership Trust.
ACCRUALS AND DEFERRED INCOME
Accruals and deferred income includes L4m (1998: L7m) relating to the
unamortized profit arising out of the unwinding of a sterling interest rate swap
in 1994. The swap was arranged in 1992 in connection with the issue of L100m
10.75% Sterling Bonds 2002. The profit is being
F-57
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
33 NOTES TO THE COMPANY BALANCE SHEET (CONTINUED)
amortized over the remaining life of the bonds. L1m (1998: L5m) is due after one
year. None of the amount falls due after five years.
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM SPECIAL OTHER AND LOSS
ACCOUNT RESERVE RESERVES ACCOUNT TOTAL
--------- --------- --------- --------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
RESERVES
SUMMARY OF MOVEMENTS
At December 31, 1998...................... 498 397 50 782 1,727
Premium on issue of 3m equity shares...... 19 - - - 19
Profit for the financial year............. - - - 487 487
Dividends................................. - - - (138) (138)
--- --- -- ----- -----
AT DECEMBER 31, 1999...................... 517 397 50 1,131 2,095
=== === == ===== =====
</TABLE>
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM SPECIAL OTHER AND LOSS
ACCOUNT RESERVE RESERVES ACCOUNT TOTAL
--------- --------- --------- --------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
RESERVES
SUMMARY OF MOVEMENTS
At December 31, 1997...................... 158 397 50 688 1,293
Premium on issue of 33m equity shares..... 340 - - - 340
Profit for the financial year............. - - - 220 220
Dividends................................. - - - (126) (126)
--- --- -- ---- -----
AT DECEMBER 31, 1998...................... 498 397 50 782 1,727
=== === == ==== =====
</TABLE>
------------------------
Note:
The special reserve represents the cumulative effect of cancellation of the
Company's share premium account. As permitted by Section 230(4) of the Companies
Act 1985, only the Group's profit and loss account has been presented.
F-58
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United Kingdom
("UK GAAP"), which differ in certain material respects from generally accepted
accounting principles in the United States ("US GAAP"). Such differences involve
methods for measuring the amounts shown in the financial statements, as well as
additional disclosures required by US GAAP.
The following is a summary of the material adjustments to consolidated
profit for the financial year and consolidated shareholders' funds that would
have been required in applying the significant differences between UK and US
GAAP.
RECONCILIATION OF CONSOLIDATED PROFIT FOR THE FINANCIAL YEAR
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------------
1999 1998
NOTE -------- --------
<S> <C> <C> <C>
PROFIT FOR THE FINANCIAL YEAR UNDER UK GAAP................. 294 437
US GAAP adjustments:
Goodwill amortization..................................... (i) (40) (68)
Intangible amortization................................... (i) (178) (91)
Gain from sale of businesses.............................. (ii) 22 97
Restructuring costs....................................... (iii) (6) (13)
Pensions and other post-retirement benefits............... (iv) 8 12
Deferred taxation......................................... (v) 32 25
Options................................................... (vii) (8) (4)
Derivatives............................................... (viii) 13 (22)
Capitalized costs......................................... (ix) - (3)
Acquisition adjustments................................... (x) 16 55
Partnerships and associates............................... (xi) (15) 5
Taxation effect of US GAAP adjustments.................... (v) 60 14
------ ------
Total US GAAP adjustments................................... (96) 7
------ ------
PROFIT FOR THE FINANCIAL YEAR UNDER US GAAP................. 198 444
====== ======
Profit from continuing operations (less charge for
applicable taxes 1999: L70m, 1998: L120m)................. 168 122
Profit from discontinued operations (less charge for
applicable taxes 1999: L18m, 1998: L28m).................. 30 322
------ ------
PROFIT FOR THE FINANCIAL YEAR UNDER US GAAP................. 198 444
====== ======
</TABLE>
F-59
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------------
1999 1998
NOTE -------- --------
<S> <C> <C> <C>
PRESENTATION OF EARNINGS PER EQUITY SHARE UNDER US GAAP (P) (P)
Earnings per equity share................................... (xv)
Basic:
Continuing operations....................................... 27.5 20.7
Discontinued operations..................................... 4.9 54.6
------ ------
Total....................................................... 32.4 75.3
====== ======
Diluted:
Continuing operations....................................... 27.2 20.5
Discontinued operations..................................... 4.9 54.1
------ ------
Total....................................................... 32.1 74.6
====== ======
Average shares outstanding (millions)....................... 610.2 589.8
Dilutive effect of stock options (millions)................. 7.0 5.1
------ ------
Average number of shares outstanding assuming dilution
(millions)................................................ 617.2 594.9
====== ======
</TABLE>
F-60
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
RECONCILIATION OF CONSOLIDATED SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------------
1999 1998
NOTE -------- --------
LM LM
<S> <C> <C> <C>
SHAREHOLDERS' FUNDS UNDER UK GAAP........................... 1,321 1,048
US GAAP adjustments:
Goodwill.................................................. (i) 591 753
Intangibles............................................... (i) 1,322 1,194
Goodwill amortization..................................... (i) (362) (343)
Intangible amortization................................... (i) (522) (336)
Restructuring costs....................................... (iii) 7 9
Pensions and other post-retirement benefits............... (iv) 4 (4)
Deferred taxation......................................... (v) 464 364
Leases.................................................... (vi) (4) (4)
Derivatives............................................... (viii) 36 23
Capitalized costs......................................... (ix) (3) (3)
Acquisition adjustments................................... (x) 3 5
Partnerships and associates............................... (xi) (4) 11
Ordinary dividends........................................ (xii) 85 81
Fixed asset investments................................... (xiii) 19 -
Interest in shares of Pearson plc......................... (xiv) (10) (2)
Taxation effect of US GAAP adjustments.................... (v) (332) (328)
------ ------
Total US GAAP adjustments................................... 1,294 1,420
------ ------
SHAREHOLDERS' FUNDS UNDER US GAAP........................... 2,615 2,468
====== ======
</TABLE>
A summary of the principal differences and additional disclosures applicable
to the Group are set out below:
(I) GOODWILL, INTANGIBLES AND AMORTIZATION
Both UK GAAP and US GAAP require purchase consideration to be allocated to
the net assets acquired at their fair value on the date of acquisition, with the
difference between the consideration and the fair value of the identifiable net
assets recorded as goodwill. Under UK GAAP for periods ending prior to
January 1, 1998, the Group has written off goodwill directly to the profit and
loss reserve in the year of acquisition. If a subsidiary or a business is
subsequently sold or closed, previously written off goodwill which was the
result of the initial acquisition is taken into account in determining the
profit or loss on sale or closure.
For the purposes of US GAAP, all goodwill written off against reserves under
UK GAAP has been reinstated as an asset on the balance sheet and is being
amortized using the straight line method over a range of estimated useful lives
of between 5 and 20 years.
F-61
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Under UK GAAP in order to recognize an intangible asset, the Group must be
able to disposed of it without disposing of the business to which it relates.
Accordingly under UK GAAP no acquired intangible assets have been recognized.
Under US GAAP, acquired assets such as publishing rights, television
production and distribution rights, non-compete agreements, software, databases
and advertising relationships have been recognized as intangible assets and are
being amortized over a range of estimated useful lives of between 2 and
16 years.
The identified intangibles were determined based on independent appraisal
and management evaluation and analysis. The carrying value of publishing rights
was L534m and L642m at December 31, 1999 and 1998 respectively.
(II) GAIN FROM SALE OF BUSINESSES
In 1999 and 1998, gains or losses were recognized under UK GAAP on the
disposal of a number of the Group's businesses. Adjustments made to reconcile US
GAAP and UK GAAP have an effect on the net assets of these businesses and,
accordingly, a corresponding impact on the gain or loss on disposal.
To the extent that goodwill previously written off under UK GAAP was brought
to account in the disposal calculation and, under US GAAP, a portion of that
goodwill was previously amortized, the carrying value of the goodwill being
disposed of will be lower on a US GAAP basis giving rise to either additional
profit on disposal or a decrease in the loss on disposal under US GAAP.
Additionally, under US GAAP, it is necessary to factor into the disposal
calculation any cumulative translation adjustment associated with the business,
whereas under UK GAAP this is not required.
(III) RESTRUCTURING COSTS
Under UK GAAP, prior to the implementation of Financial Reporting Standard
12 (FRS 12) PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS in 1999,
the recognition of restructuring provisions was allowable when a decision was
taken to restructure part of a company's operations, and no specific criteria
had to be fulfilled. US GAAP requires a number of specific criteria to be met
before such anticipated costs can be recognized as a liability. Costs which do
not meet the specific criteria under US GAAP are recognized as liabilities when
an obligation exists to pay cash or otherwise sacrifice assets. Following
implementation of FRS 12 criteria similar to that set forth under US GAAP must
be met before a provision may be recorded under UK GAAP. Restructuring costs are
classified as an operating expense of the business.
F-62
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table sets out the movements in restructuring provisions under
US GAAP during the year:
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
At January 1................................................ 42 19
Exchange differences........................................ 1 -
Subsidiary undertakings acquired / disposed................. 1 20
Transfers................................................... 1 1
Released.................................................... (3) -
Provided.................................................... 14 7
Utilised.................................................... (31) (5)
--- --
At December 31.............................................. 25 42
=== ==
</TABLE>
The majority of the above restructuring provision relates to provisions
established in respect of the integration of Simon & Schuster with our existing
Education business and was established under US GAAP in purchase accounting.
Included within this provision were redundancy costs related to employees in the
following business functions: warehousing, administration and finance. The
provision includes employee termination costs and other integration costs.
(IV) PENSIONS AND OTHER POST-RETIREMENT BENEFITS
PENSIONS
The Group operates defined benefit pension plans for its employees and
former employees throughout the world. The largest defined benefit scheme is a
funded scheme operated in the UK.
Under UK GAAP the cost of providing pension benefits is expensed over the
average expected service lives of eligible employees in accordance with the
provisions of Statement of Standard Accounting Practice 24 (SSAP 24) ACCOUNTING
FOR PENSION COSTS. SSAP 24 aims to produce an estimate of cost based on
long-term actuarial assumptions. Variations from the regular pension cost
arising from, for example, experience deficiencies or surpluses, are charged or
credited to the profit and loss account over the expected average remaining
service lives of current employees in the schemes.
Under US GAAP, the annual pension cost comprises the estimated cost of
benefits accruing in the period as determined in accordance with Statement of
Financial Accounting Standards 87 (SFAS 87) EMPLOYERS ACCOUNTING FOR PENSIONS,
which requires readjustment of the significant actuarial assumptions annually to
reflect current market and economic conditions. Under SFAS 87, part of the
surplus (the excess of plan assets over plan liabilities), the majority of which
for the Group is attributable to prior acquisitions, has been recognized in the
balance sheet. The remainder of the unrecognized surplus is spread over the
employees' remaining service lifetimes.
In the UK, the majority of the pension benefits for Pearson employees are
provided by the Pearson Group Pension Plan.
F-63
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
In addition, in the UK, there is a closed defined benefit plan with no
active members (the Westminster Press Pension Plan). Although this plan has a
large surplus the Group does not believe that it will be able to gain benefit
from this surplus in the future. Under UK GAAP this plan and the associated
pension credit has not been recognized. US GAAP requires calculations to be
carried out for all defined benefit plans regardless of the funded status and
likely use of any surplus. Thus the US GAAP numbers in respect of the UK schemes
include amounts in respect of the Westminster Press Pension Plan.
In the US, the Group sponsors several defined benefit plans to which
employees participate.
In accordance with SFAS 132, EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER
POST-RETIREMENT BENEFITS, the components of net periodic pension cost for all
Group-sponsored schemes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
UK NON-UK
SCHEMES SCHEMES
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
Components of pension expense:
Service cost................................................ 16 17 12 5
Interest cost............................................... 61 62 4 4
Expected return on plan assets.............................. (78) (89) (4) (4)
Amortization of unrecognized transition asset............... (3) (3) - -
Amortization of unrecognized prior service cost............. - - - -
Amortization of unrecognized net loss....................... 3 - - -
--- --- -- --
Net periodic pension cost/(benefit)......................... (1) (13) 12 5
Curtailment................................................. - - - -
--- --- -- --
Total benefit cost/(benefit)................................ (1) (13) 12 5
=== === == ==
</TABLE>
F-64
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table sets out the benefit obligation and plan assets of the
UK pension plans in accordance with US GAAP:
<TABLE>
<CAPTION>
UK SCHEMES
AS AT
DECEMBER 31
-------------------------
<S> <C> <C>
1999 1998
----- -----
LM LM
Change in benefit obligation:
Benefit at prior measurement date........................... 1,005 912
Service cost................................................ 16 17
Interest cost............................................... 61 62
Plan participants' contribution............................. 5 5
Actuarial (gain)/loss....................................... (61) 54
Special termination benefits................................ - -
Benefits paid............................................... (51) (45)
----- -----
Benefit obligation at current measurement date.............. 975 1,005
===== =====
Change in plan assets:
Fair value of plan assets at prior measurement date......... 988 1,014
Actual return on plan assets................................ 170 14
Employer contribution....................................... - -
Plan participants' contribution............................. 5 5
Benefits paid............................................... (51) (45)
----- -----
Fair value of plan assets at current measurement date....... 1,112 988
===== =====
Funded status............................................... 137 (17)
Unrecognized actuarial (gain)/loss.......................... (27) 129
Unrecognized transition asset............................... (12) (15)
Unrecognized prior service cost............................. - -
----- -----
Net amount recognized....................................... 98 97
===== =====
</TABLE>
As at December 31, 1999 none of the UK plans had an accumulated benefit
obligation in excess of the plan assets. As at December 31, 1998 the projected
benefit obligation, accumulated benefit obligation, and fair value of plan
assets for the UK pension plan with an accumulated benefit obligation in excess
of plan assets were L965m, L948m and L931m respectively. For the two US plans
where the accumulated benefit obligations exceeded plan assets, these amounts
were L6m, L6m and Lnil, respectively (1998: L6m, L6m and Lnil)
For the Westminster Press Pension Plan in the UK, it was assumed that there
was a substantive commitment that pension benefits would increase in the future
at an annual rate of 4%. For the main UK plan, pension increases are assumed to
be in accordance with legal requirements. No pension increases are anticipated
for the US pension plans.
F-65
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table sets out the benefit obligation and plan assets of the
non-UK pension plans in accordance with US GAAP:
<TABLE>
<CAPTION>
NON-UK
SCHEMES
AS AT
DECEMBER 31
-----------------------
1999 1998
-------- --------
LM LM
<S> <C> <C>
Change in benefit obligation:
Benefit at prior measurement date........................... 62 52
Adjustment due to change in measurement date................ (9) -
--- ---
As restated................................................. 53 52
Service cost................................................ 12 5
Interest cost............................................... 4 4
Plan participants' contribution............................. - -
Plan amendments............................................. - (5)
Acquisition................................................. - 6
Actuarial (gain)/loss....................................... (3) 4
Foreign exchange impact..................................... 2 -
Benefits paid............................................... (9) (4)
--- ---
Benefit obligation at current measurement date.............. 59 62
=== ===
Change in plan assets:
Fair value of plan assets at prior measurement date......... 47 44
Adjustment due to change in measurement date................ (1) -
--- ---
As restated................................................. 46 44
Actual return on plan assets................................ 6 5
Employer contribution....................................... 1 2
Plan participants' contribution............................. - -
Foreign exchange impact..................................... 1 -
Benefits paid............................................... (9) (4)
--- ---
Fair value of plan assets at current measurement date....... 45 47
=== ===
Funded status............................................... (14) (15)
Unrecognized actuarial gain................................. (12) -
Unrecognized transition asset............................... (1) (1)
Unrecognized prior service cost............................. (3) (3)
--- ---
Net amount recognized....................................... (30) (19)
=== ===
</TABLE>
Plan assets are held in separately administered trusts and consist
principally of listed debt and equity securities.
F-66
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Assumptions used to determine the pension cost for the defined benefit plans
under US GAAP were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 (%) 1998 (%)
------------------- -------------------
UK NON-UK UK NON-UK
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Discount rate............................................... 6.50 7.25 6.25 6.75
Rate of return on assets.................................... 8.00 9.00 8.00 9.00
Salary growth............................................... 4.25 4.50 4.00 4.50
Pension increases........................................... 2.75 n/a 2.50 n/a
</TABLE>
The Group also sponsors defined contribution pension plans covering
employees in Australia, India, Mexico and certain employees in Germany.
Contributions are recognized as paid and during 1999 amounted to L6m (1998:
L5m).
OTHER POST-RETIREMENT BENEFITS
The Group also provides post-retirement health care plans for certain
employees. Additional disclosures required under US GAAP are as follows:
<TABLE>
<CAPTION>
US POST-RETIREMENT
MEDICAL PLANS
---------------------------
1999 1998
-------- --------
LM LM
<S> <C> <C>
Net periodic benefit cost:
Service cost................................................ 1 1
Interest cost............................................... 3 2
Expected return on plan assets.............................. - -
Amortization of transitional obligation/(asset)............. - -
Amortization of prior service cost.......................... - -
Recognized net actuarial (gain)/loss........................ - -
---- ----
Net periodic benefit cost................................... 4 3
==== ====
Change in benefit obligation:
Benefit obligation at beginning of year..................... 49 14
Adjustment due to change in measurement date................ 1 -
---- ----
As restated................................................. 50 14
Service cost................................................ 1 1
Interest cost............................................... 3 2
Plan participants' contributions............................ - -
Plan amendments............................................. - (1)
Acquisition................................................. - 34
Actuarial gain.............................................. (3) -
Benefits paid............................................... (3) (1)
Foreign exchange impact..................................... 2 -
---- ----
Benefit obligation at current measurement date.............. 50 49
==== ====
</TABLE>
F-67
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
US POST-RETIREMENT
MEDICAL PLANS
---------------------------
1999 1998
-------- --------
LM LM
<S> <C> <C>
Change in plan assets:
Fair value at beginning of year............................. - -
Actual return on plan assets................................ - -
Acquisition................................................. - -
Employer contribution....................................... 3 1
Plan participants' contributions............................ - -
Foreign exchange impact..................................... - -
Benefits paid............................................... (3) (1)
---- ----
Fair value at current measurement date...................... - -
==== ====
Funded status............................................... (50) (49)
Unrecognized net actuarial loss............................. 1 3
Unrecognized transition obligation/(asset).................. - -
Unrecognized prior service cost............................. (1) (1)
Amounts contributed to plan during fourth quarter........... 1 -
---- ----
Prepaid/(accrued) benefit cost.............................. (49) (47)
==== ====
Amount recognized in statement of financial position consist
of:
Prepaid benefit cost........................................ - -
Accrued benefit liability................................... (49) (47)
Intangible asset............................................ - -
Accumulated other comprehensive income...................... - -
---- ----
Net amount recognized....................................... (49) (47)
==== ====
Assumptions used to determine the post-retirement benefit costs under
US GAAP were:
Discount rate............................................... 7.25% 6.75%
</TABLE>
For measurement purposes, a 7.0% annual rate of increase in the per capita
cost of covered medical benefits was assumed for 2000. The rate was assumed to
decrease 0.5% annually to 5.0% in 2004 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects on the
results:
<TABLE>
<CAPTION>
1999 1998
LM LM
------------------- -------------------
+1% -1% +1% -1%
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Effect on post retirement benefit obligation at December
31........................................................ 4 (4) 3 (3)
</TABLE>
There would be no material effect on service cost and interest cost.
F-68
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(V) DEFERRED TAXATION
Under UK GAAP, a provision is recorded for deferred taxation under the
liability method, at the expected applicable rates, to the extent that such
taxation is expected to crystallise within the foreseeable future. This means
that the full potential liability is not necessarily provided. Additionally,
deferred tax assets are recognized only when they are expected to be recoverable
within the foreseeable future.
Under US GAAP, deferred taxation is provided for on a full liability basis.
Under the full liability method, deferred taxation assets or liabilities are
recognized for differences between the financial and taxation basis of assets
and liabilities and for tax loss carry forwards at the statutory rate at each
reporting date. A valuation allowance is established when it is more likely than
not that some portion or all of the deferred taxation assets will not be
realized. The reconciling items in 1998 and 1999 reflect the impact of recording
the full contingent provision and deferred tax assets, net of valuation
allowance.
The following table analyzes profit before taxation on a UK GAAP basis:
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
United Kingdom.............................................. 339 467
Overseas.................................................... 141 162
--- ---
Total profit before taxation................................ 480 629
=== ===
</TABLE>
Classification of the Group's deferred tax (liabilities and assets) under US
GAAP is as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------
CURRENT CURRENT NON-CURRENT NON-CURRENT
ASSETS LIABILITIES ASSETS LIABILITIES
DEFERRED TAX ANALYSIS -------- ----------- ------------ ------------
LM LM LM LM
<S> <C> <C> <C> <C>
Fixed asset and investment related.......... - - 28 (55)
Receivable related.......................... 106 - - -
Inventory related........................... 59 - - -
Pension provisions.......................... - - 54 -
Other provisions and accruals............... 48 - - -
Undistributed earnings...................... - (19) - -
Interest.................................... 10 (9) - -
Intangibles................................. - - - (151)
Goodwill.................................... - - - (11)
Tax losses.................................. - - 183 -
Other....................................... 10 (10) 9 (57)
--- --- --- ----
233 (38) 274 (274)
Valuation allowance......................... (38) - (45) -
--- --- --- ----
195 (38) 229 (274)
=== === === ====
</TABLE>
F-69
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------
CURRENT CURRENT NON-CURRENT NON-CURRENT
ASSETS LIABILITIES ASSETS LIABILITIES
DEFERRED TAX ANALYSIS -------- ----------- ------------ ------------
LM LM LM LM
<S> <C> <C> <C> <C>
Fixed asset and investment related.......... - - 51 (49)
Receivable related.......................... 88 - - -
Inventory related........................... 46 - - -
Pension provisions.......................... - - 34 -
Other provisions and accruals............... 52 - - -
Undistributed earnings...................... - (15) - -
Interest.................................... 26 (5) - -
Intangibles................................. - - - (178)
Goodwill.................................... - - - (36)
Tax losses.................................. - - 162 -
Other....................................... 10 (14) 7 (25)
--- --- --- ----
222 (34) 254 (288)
Valuation allowance......................... (65) - (72) -
--- --- --- ----
157 (34) 182 (288)
=== === === ====
</TABLE>
The movements in the valuation allowance are set out below:
<TABLE>
<CAPTION>
1999 1998
VALUATION ALLOWANCE -------- --------
LM LM
<S> <C> <C>
At January 1................................................ (137) (87)
Change in estimate.......................................... 63 -
Current year loss........................................... (6) (50)
Exchange.................................................... (3) -
---- ----
At December 31.............................................. (83) (137)
==== ====
</TABLE>
The recognized deferred tax asset is based upon the expected future
utilization of tax loss carryforwards and the reversal of other temporary
differences. For financial reporting purposes, the Group has recognized a
valuation allowance for those benefits for which realization does not meet the
more likely than not criteria.
The valuation allowance has been recognized in respect of the tax loss
carryforwards. The Group continually reviews the adequacy of the valuation
allowance and is recognizing these benefits only as reassessment indicates that
it is more likely than not that the benefits will be realized. The reduction in
the valuation allowance in 1999 results from planned disposals (principally
Lazards) which will create taxable income in 2000 against which previously
recognized tax losses may be offset.
The majority of the Group's tax losses expire within 20 years.
F-70
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Provision has only been made for UK or additional foreign taxes on
undistributed earnings of foreign subsidiaries where there is an intention to
remit such earnings. No provision has been made in respect of other foreign
earnings because they are intended to be permanently reinvested. It is not
practicable to estimate the amount of additional tax that might be payable on
these other foreign earnings.
(VI) LEASES
UK GAAP defines a finance (capital) lease as one that transfers
substantially all the risks and rewards of ownership of an asset to the lessee.
US GAAP sets out certain defined criteria, and if any one of the criteria are
met, the lease must be treated as a capital lease. Accordingly, the Group has
certain leases for which the classification is operating under UK GAAP and
finance under US GAAP.
(VII) OPTIONS
The Group maintains savings related share option schemes, a bonus matching
share option scheme, a profit sharing award scheme and further share option
schemes for selected employees.
ANNUAL BONUS SHARE MATCHING PLAN
The share matching plan permits Senior Management, as well as other senior
executives in Pearson, to take up to 50% of any after tax annual bonus in the
form of Ordinary Shares. These shares will be matched by Pearson on a before-tax
basis at a rate of one matching share for every two shares held for three years,
with an additional one share for every two shares held for a total of five
years. Matching is conditional upon the recipient remaining employed by Pearson
at the time of grant and to real average growth in Pearson's adjusted earnings
per share of at least 3% per year during the relevant period.
LONG-TERM INCENTIVE PLANS
Long-term incentive plans are intended to align the interests of Senior
Management, other senior executives, managers and other employees with those of
shareholders. The Personnel Committee reviews the operation of long-term
incentive plans on a regular basis, taking into account UK legislative and
regulatory developments, particularly with regard to performance targets and
evolving UK best practice. In 1999, the Company's shareholders approved adoption
of a new long-term incentive plan called the Pearson Reward Plan in which Senior
Management now participate.
The Pearson Reward Plan has two elements: (1) Pearson Premium Options (PPOs)
linked to the rise in the Pearson share price over three to seven years and
(2) Pearson shares in the form of Pearson Equity Incentives (PEIs) linked to the
three-year cumulative growth in Pearson's free cash flow (operating cash flow
less tax liabilities on operating activities and interest paid). To date there
has been only one award under this plan (made in 1999) which award was based on
free cash flow. The Personnel Committee has the option to consider and specify
other measures but has not
F-71
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
done so. Senior Management are not eligible for grants of conventional options
under the Share Option Plan in any year in which they receive an award under the
Pearson Reward Plan.
INCENTIVE SHARE PLAN
The Company's Incentive Share Plan was introduced in 1993 to reward Senior
Management based on the performance of the Company over the medium to longer
term as measured by total shareholder return relative to the average of the
FT-SE 100 total return index. There remains one outstanding award, which matures
in April 2002. No new awards have been or will be made under this plan.
EXECUTIVE SHARE OPTION PLAN
In 1998, the Company's shareholders approved an Executive Share Option Plan
pursuant to which options at market value on the date of grant are granted to
Senior Management and other senior executives based on guidelines approved by
the Personnel Committee. These guidelines govern the total number of options
which may be granted and the frequency of awards to individual grantees.
EMPLOYEE SHARE OWNERSHIP PLANS
PROFIT SHARING PLAN
Pearson operates a profit sharing plan available to all employees who
(1) have worked for Pearson for at least six months of the relevant fiscal year
and (2) who are employed by Pearson at the time payment under the plan is made.
All payments made under the plan are determined at the discretion of the Pearson
board after consideration of Pearson's profitability for the year. Payment under
the plan may be in the form of cash and/or Pearson's Ordinary Shares.
SAVE-FOR-SHARES PLAN
In 1998, Pearson introduced a Worldwide Save-for-Shares Plan. Under this
plan, Pearson's employees worldwide are invited to save a portion of their
monthly salary over a period from two to seven years (at the employee's option).
At the end of this period, the employee has the option to purchase Ordinary
Shares with the accumulated funds at a purchase price equal to 80% of the market
price prevailing at the time the employee's participation in the plan commenced.
F-72
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Activity with respect to the share option schemes is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
EXECUTIVE SHARE OPTIONS PLANS SHARES PRICE SHARES PRICE
----------------------------- -------- --------- -------- ---------
('000) L ('000) L
<S> <C> <C> <C> <C>
Outstanding at January 1........................... 8,906 8.02 8,626 6.24
Granted............................................ 3,494 12.15 3,189 10.76
Exercised.......................................... (1,157) 5.94 (2,296) 5.59
Surrendered or expired............................. (249) 9.26 (613) 7.90
------- ----- ------ -----
Outstanding at December 31......................... 10,994 9.53 8,906 8.02
======= ===== ====== =====
<CAPTION>
SAVE FOR SHARE PLANS
--------------------
Outstanding at January 1. 4,123 6.03 4,702 4.42
<S> <C> <C> <C> <C>
Granted............................................ 1,472 10.22 1,723 7.69
Exercised.......................................... (958) 4.43 (1,093) 2.91
Surrendered or expired............................. (671) 7.12 (1,209) 4.86
------- ----- ------ -----
Outstanding at December 31......................... 3,966 7.77 4,123 6.03
======= ===== ====== =====
</TABLE>
Share options outstanding and exercisable at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
SHARE OPTIONS
SHARE OPTIONS OUTSTANDING EXERCISABLE
----------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES (IN L) SHARES LIFE PRICE SHARES PRICE
-------------------------------------- -------- ------------ --------- -------- ---------
('000) L ('000) L
<S> <C> <C> <C> <C> <C>
0-3.................................. 39 N/a N/a 39 2.42
3-6.................................. 2,156 1 Year 3.85 906 4.73
6-9.................................. 4,899 4 Years 7.63 1,264 8.50
9-12................................. 4,387 6 Years 10.60 N/a N/a
12-15................................. 3,479 9 Years 12.15 N/a N/a
</TABLE>
Under UK GAAP, the Group does not recognise compensation costs under share
option schemes that have not been approved by the Inland Revenue unless the
exercise price is at a discount to the open market value at date of grant. Under
US GAAP, the compensation expense associated with the Pearson Incentive Share
Plan, Annual Bonus Matching Plan, the Pearson Reward Plan, the Executive Share
Option schemes, the Save as You Earn Scheme and the Worldwide Save for Shares
Plan, in consideration for services received, is recognized in accordance with
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123).
F-73
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Under SFAS 123, compensation expense is determined based upon the fair value
at the grant date for awards, and has been estimated using the Black Scholes
model. Such compensation cost is recognized over the service life of the awards,
normally the equivalent to the vesting period of such awards.
Generally, option plans which are available to all employees and provide a
discount no greater than 15% are considered non-compensatory under SFAS 123. The
Save as You Earn Option Scheme and Worldwide Save for Shares Plan are considered
compensatory under SFAS 123 since the discount is 20%. The total compensation
cost (equal to the 20% discount) is recognized over the period beginning on the
grant date.
The following weighted-average assumptions were assumed in determining the
fair value of options for the Pearson Incentive Share Plan, Annual Bonus
Matching Plan, the Pearson Reward Plan, the Executive Share Option schemes, the
Save as you Earn scheme and the Worldwide Save for Shares plan: exercise price
is equal to the fair value of the stock on the grant date; risk-free interest
rate is the gilt rate (ranging from 4.23% to 8.27%) for securities whose
maturity equals the expected life of the options on the grant date; expected
lives of 2 to 7 years; expected volatility ranging from 21.3% to 31.2% and a
dividend yield of between 1.62% and 4.47%.
(VIII) DERIVATIVES
The additional US GAAP derivative and financial instrument disclosures are
presented below. This information should be read in conjunction with Note 19.
Under UK GAAP, the Group's derivatives are recorded as hedging instruments.
Amounts payable or receivable in respect of interest rate swaps are accrued with
net interest payable over the period of the contract. Unrealized gains and
losses on currency swaps and forward currency contracts are deferred and
recognized when paid.
Under US GAAP, derivative contracts, such as interest rate swaps, currency
swaps and forward currency contracts are recorded at market value. All gains and
losses are included in income. The instruments used to manage the risks'
exposure do not meet the prescriptive criteria for hedge accounting under US
GAAP, in particular SFAS 52 FOREIGN CURRENCY TRANSLATION and SFAS 80 ACCOUNTING
FOR FUTURES CONTRACTS and the related literature providing guidance on these
matters.
F-74
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The contract/notional principal amounts of derivative instruments that are
off-balance-sheet under UK GAAP, by category and by currency, are listed below.
The unrealized foreign exchange gain/loss on currency swaps are reflected in the
balance sheet under UK GAAP.
<TABLE>
<CAPTION>
INTEREST RATE SWAPS MATURITY 1999 1998 1997
------------------- ---------- -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
US DOLLAR
Pay variable / receive fixed.............................. 2006 155 151 152
Av fixed rate......................................... 7.23%
Av variable rate...................................... 7.04%
Pay fixed / receive variable.............................. 2000/2009 1,006 599 267
Av fixed rate......................................... 6.06%
Av variable rate...................................... 6.94%
Forward start pay fixed / receive variable................ 2003 118 491 76
Av fixed rate......................................... 6.44%
Av variable rate...................................... 6.99%
STERLING
Pay variable / receive fixed.............................. 2002/2008 120 120 120
Av fixed rate......................................... 6.74%
Av variable rate...................................... 6.83%
Pay fixed / receive variable.............................. 2000/2001 70 40 40
Av fixed rate......................................... 6.22%
Av variable rate...................................... 6.68%
Forward start pay variable / receive fixed................ 2003 100 - -
Av fixed rate......................................... 7.00%
Av variable rate...................................... 6.45%
EURO
Pay variable / receive fixed.............................. 2004 248 - -
Av fixed rate......................................... 4.63%
Av variable rate...................................... 5.75%
</TABLE>
F-75
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
MATURITY 1999 1998 1997
---------- -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
CURRENCY AND INTEREST RATE SWAPS
Pay US dollar variable / receive sterling fixed at
$1.61................................................... 2002/2014
At inception of contract.............................. 375 125 125
At balance sheet date................................. 375 117 117
Av fixed rate......................................... 8.13%
Av variable rate...................................... 7.41%
Pay US dollar variable / receive Euro fixed at $1.04...... 2004
At inception of contract.............................. 93 - -
At balance sheet date................................. 97 - -
Av fixed rate......................................... 4.63%
Av variable rate...................................... 7.62%
------ --- ---
FORWARD FOREIGN EXCHANGE CONTRACTS........................ 347 13 50
====== === ===
</TABLE>
The above financial instruments represent trading instruments which do not
qualify for hedge accounting under US GAAP. The Group does not meet the
designation and correlation tests criteria which are not a requirement to obtain
hedge accounting under UK GAAP. In line with Pearson treasury policy, these are
however not trading instruments and are transacted solely to match underlying
financial exposures.
The principal method the Group uses to manage its interest rate risk is to
enter into swaps to pay a fixed rate and receive a floating rate. The majority
of these contracts are US dollar denominated, and some of them have a deferred
start date, in order to maintain the desired risk profile as other contracts
mature. The variable rates received are normally based on 3 month LIBOR, and the
dates on which these rates are set do not exactly match those of the borrowings
that are being hedged. The Group believes that its portfolio of such swaps is an
efficient hedge of its portfolio of variable rate borrowings.
The Group from time to time issues bonds or other capital market instruments
to refinance existing bank debt. In order to avoid undue concentration of
interest expense being set by the rate on a single transaction, it is the
Group's normal practice on such occasions to enter into a related derivative
contract which has the effect of converting the bond transaction to the same
interest rate profile as the debt which it is refinancing (i.e most often a
floating rate US dollar interest rate basis). In several cases the bond issue
has been in a different currency than the debt being refinanced and the Group
has entered into a related interest rate and currency swap in order to maintain
an unchanged borrowing risk profile.
The Group's policy concerning the proportion of fixed rate debt in its debt
portfolio is that between 50% and 65% of current core debt (i.e. year end total
borrowings net of year end cash and liquid funds) should be hedged for the next
two years, and that between 40% and 60% should be hedged from two years to a
date five years from the present. Within these target ranges the proportion that
is hedged is triggered by a formula based on historical interest rate
frequencies. Taking into account the effect of all derivative contracts, the
proportion of net borrowings that were
F-76
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
hedged at the end of 1999 was L1,155m, representing 58% of the year-end
financial liability portfolio, at an average fixed rate of 6.41%. This compares
to a proforma hedged proportion of 53% in 1998.
Of the L347m of outstanding foreign exchange contracts at December 31,1999,
L279m of receive US dollars/pay Sterling contracts relate to the announced
disposal of Lazard banking houses which completed on March 3, 2000 for L436m. In
addition, a further L47m of receive US dollars/pay Euros contracts, with a
maturity of less than one month, transferred surplus US dollar cash balances
into Euros to temporarily fund the purchase of a further 20% stake in Recoletos.
Credit risk represents the possibility that the Group would suffer a loss if
a counterparty was to default on its obligations to the Group. Credit risk
exposure arises primarily from the placement of surplus cash funds with
financial institutions, as well as from interest rate, currency swap and foreign
exchange products. For derivative financial instruments, total credit exposure
consists of current and potential exposure. Current credit exposure represents
the replacement cost of the transaction. Potential credit exposure is a
statistically based estimate of the future replacement cost of the transaction.
The Group has established policies and procedures to manage the level and
composition of its credit risk on both a transaction and a portfolio basis. In
managing the aggregate credit extension to individual counterparties, the Group
measures the amount at risk on derivative financial instruments as the total of
current and potential credit exposure. Additional financial instruments which
potentially subject the Group to concentrations of credit risk consist of
accounts receivable. Management believes the concentration of credit risk
associated with accounts receivable is minimal due to the dispersion over many
customers and different businesses.
Financial instruments with off balance sheet credit risk consist of interest
rate swaps. The maximum accounting loss the Group would incur if counterparties
failed completely to perform according to the contract terms would be L38m (L22m
in 1998), L10m of which is accrued interest receivable (1998: L6m). Since the
year-end, for certain longer dated higher value derivative contracts the Group
has entered into mark to market agreements whose effect is to reduce
significantly the counterparty risk of the relevant transactions by the posting
of collateral between parties on a quarterly annual basis.
In the Group's opinion there is no significant concentration of credit risk
with any individual counterparty or groups of counterparties. The greatest
accounting loss if a single party failed completely to perform according to the
contract terms would be L17m (L15m in 1998), which is to a AA rated financial
institution.
F-77
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table provides a comparison by category of the carrying values
under UK GAAP and the fair values of the Group's financial assets and
liabilities (both on and off balance sheet).
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
BOOK FAIR BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
PRIMARY FINANCIAL INSTRUMENTS -------- -------- -------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Other financial assets.............................. 4 4 4 4 6 6
Other financial liabilities......................... (31) (31) (54) (54) (33) (33)
Cash................................................ 288 288 305 305 144 144
Short term deposits................................. 40 40 40 40 71 71
Short term borrowings............................... (47) (47) (72) (72) (313) (313)
Medium and long term borrowings..................... (2,276) (2,307) (2,552) (2,635) (609) (669)
------ ------ ------ ------ ---- ----
(2,022) (2,053) (2,329) (2,412) (734) (794)
DERIVATIVE INSTRUMENTS
Pay fix interest rate swaps......................... - 32 - (28) - -
Pay variable interest rate swaps.................... - (9) - 13 - 16
Currency swaps...................................... - 10 - 24 - 19
Foreign exchange contracts.......................... - 1 - - - -
------ ------ ------ ------ ---- ----
TOTAL............................................... (2,022) (2,019) (2,329) (2,403) (734) (759)
====== ====== ====== ====== ==== ====
</TABLE>
For a discussion of the basis for estimating the fair value for each
category of financial instruments, refer to Note 19.
(IX) CAPITALIZED COSTS
The Group has capitalized certain amounts under UK GAAP for computer
hardware, software and consulting services. Under US GAAP, certain of these
costs cannot be capitalized and must be expensed as incurred. The resulting
adjustment takes into consideration the treatment of these costs, as well as any
depreciation taken in subsequent periods.
(X) ACQUISITION ADJUSTMENTS
Acquisition adjustments principally relate to restructuring provisions
recognized under US GAAP in purchase accounting for HarperCollins Educational
and Simon & Schuster as a reduction of goodwill under Emerging Issues Task Force
95-3 (EITF 95-3) RECOGNITION OF LIABILITIES IN PURCHASE ACCOUNTING. Under UK
GAAP these costs were treated as period costs and were recorded as exceptional
items in the profit and loss account.
(XI) PARTNERSHIPS AND ASSOCIATES
There is no difference under UK and US GAAP for the accounting for
partnerships and associates. However the accounts of partnerships and associates
must be adjusted from UK to US GAAP. which has an impact on the results of the
partnerships and associates, as well as the carrying value of the investment in
these entities. Principal differences identified with respect to the
F-78
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Group's investments in partnerships and associates include: goodwill
amortization, pensions, capitalized costs, derivatives, and goodwill impairment
charges.
(XII) ORDINARY DIVIDENDS
Under UK GAAP, ordinary dividends proposed are provided for in the year in
respect of which they are recommended by the Board of Directors although
approval of the final dividend will not take place until the Annual General
Meeting subsequent to the year-end. Under US GAAP, such dividends are provided
for in the year in which they are declared and approved by the Board of
Directors.
(XIII) FIXED ASSET INVESTMENTS
Under UK GAAP, fixed asset investments are stated at cost less provisions
for diminution in value, or as revalued by the directors. Under US GAAP,
SFAS 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
requires debt and equity securities with readily ascertainable market values be
adjusted to market value at the end of each period. Unrealized market value
gains and losses are charged to earnings if the securities are traded for
short-term profit. Otherwise securities are classified as "available for sale"
and unrealized gains and losses are reported as a separate component of other
comprehensive income until realized.
At December 31, 1999 and 1998 all securities covered by SFAS 115 were
designated by management as available for sale. Proceeds and gross gains from
the sale of available for sale securities were L28m and L27m under UK GAAP
respectively for the year ended December 31, 1998. There were no sales of
available for sale securities in 1999.
(XIV) INTEREST IN SHARES OF PEARSON PLC
Under UK GAAP, shares in Pearson plc held by the employee share ownership
trusts are recorded in the balance sheet within fixed asset investments at
December 31, 1999 and debtors at December 31, 1998. These shares are recorded at
cost including expenses. Under US GAAP, shares in Pearson plc held by the
employee share ownership trusts are recorded as an offset to equity.
(XV) PRESENTATION OF EARNINGS PER EQUITY SHARE
US GAAP requires presentation of basic and diluted earnings per equity share
(EPS) using both income from continuing operations and net income. Therefore, an
entity that reports a discontinued operation, an extraordinary item or
cumulative effect of an accounting change must present basic and diluted EPS for
those line items. Accordingly, the Group has presented EPS for continuing and
discontinued operations.
F-79
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(XVI) OTHER DISCLOSURES REQUIRED BY US GAAP
PRESENTATION IN THE FINANCIAL STATEMENTS
Under UK GAAP, operating profit may be shown before specific costs that
under US GAAP would be included within operating profit. Additionally, the
presentation of earnings per share is not limited to basic and diluted earnings
per share on the net profit or loss for the period attributable to ordinary
shareholders. Presentation of operating profit before certain costs and
additional earnings per share data is allowable when management believe that it
provides useful information to an investor and presents a true and fair view of
the Company's results. Under US GAAP, costs such as internet operations,
goodwill amortization and other items would be included within operating profit.
Earnings per share may only be presented on a basic and diluted basis for profit
or loss from continuing operations, profit or loss from discontinued operations
and net profit or loss for the period. Accordingly, the presentation of
"operating profit before internet operations, goodwill amortization and other
items" as well as "adjusted earnings per equity share after internet
enterprises" and "adjusted earnings per equity share before internet
enterprises" is not allowed under US GAAP.
COMPREHENSIVE INCOME
SFAS 130 REPORTING COMPREHENSIVE INCOME requires prominent presentation of a
primary statement showing total recognized gains and losses (total comprehensive
income). The total gains and losses recognized in the period attributable to
shareholders' comprises net income plus gains and losses recognized directly in
equity, such as movements in foreign currency translation differences. The Group
has opted to display comprehensive income in accordance with UK GAAP. Total
gains and losses are presented in the UK GAAP primary statement under "Statement
of total recognized gains and losses". The movements in shareholders' funds
between the beginning of the year and the end of the year are presented in the
UK GAAP primary statement "Reconciliation of movements in equity shareholders'
funds". The components of equity shareholders' funds on a UK GAAP basis are
shown in the following disclosure.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Called up share capital..................................... 153 152 144
Share premium account....................................... 517 498 158
Revaluation reserve......................................... - 1 3
Other reserves.............................................. - 1 1
Retained earnings........................................... 600 383 (175)
Cumulative currency translation difference.................. 51 13 21
----- ----- ----
EQUITY SHAREHOLDERS' FUNDS AT END OF THE YEAR............... 1,321 1,048 152
===== ===== ====
</TABLE>
CASH FLOW INFORMATION
Under UK GAAP, the Consolidated Cash Flow Statements are presented in
accordance with FRS 1, as revised, CASH FLOW STATEMENTS. The statements prepared
under FRS 1 present
F-80
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
substantially the same information as that required under US GAAP as interpreted
by SFAS 95 STATEMENT OF CASH FLOWS.
The definition of "cash flow" differs between UK and US GAAP. Cash flow
under UK GAAP represents increases or decreases in "cash", which comprises cash
in hand and repayable on demand and overdrafts. Under US GAAP, cash flow
represents increases or decreases in "cash and cash equivalents", which include
short term, highly liquid investments with original maturities of less than
90 days, and exclude overdrafts.
Under UK GAAP, cash flows are presented for operating activities; dividends
received from partnerships and other associates; returns on investments and
servicing of finance; taxation; capital expenditure and financial investment;
acquisitions and disposals; equity dividends paid; management of liquid
resources and financing. US GAAP requires the classification of cash flows as
resulting from operating, investing and financing activities.
Cash flows under UK GAAP in respect of interest received, interest paid,
investment income and taxation would be included within operating activities
under US GAAP. Capital expenditure and financial investment, dividends received
from partnerships and associates, and cash flows from acquisitions and disposals
would be included within investing activities under US GAAP. Equity dividends
paid would be included within financing activities under US GAAP. Management of
liquid resources may be included within financing activities or the liquid
resources may be considered a cash equivalent under US GAAP, depending on the
nature of the liquid resources.
A summary of the Group's operating, investing and financing activities,
classified in accordance with US GAAP, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
Net cash provided by operating activities................... 136 286
Net cash provided by/(used in) investing activities......... 328 (2,085)
Net cash (used in) / provided by financing activities....... (460) 1,961
Foreign exchange differences................................ (22) (30)
----- ------
Net increase in cash and cash equivalents................... (18) 132
Cash and cash equivalents under US GAAP at the beginning of
the year.................................................. 337 205
----- ------
Cash and cash equivalents under US GAAP at the end of the
year...................................................... 319 337
===== ======
</TABLE>
SEGMENTS
Pearson has determined that its reportable segments are those that are based
on the Group's method of internal reporting, which disaggregates its business by
product category. The Group's segments are strategic business units that offer
different products and services.
The Group's business units and reportable segments are as follows:
- FT Group--publisher of daily business newspapers and provider of online
business information
F-81
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
- Pearson Education--publisher of educational materials, including textbooks
and teaching materials, as well as electronic educational programs
- The Penguin Group--publisher of English language fiction and non-fiction
books for adults and children
- Pearson Television--television production company involved in production
of new programs and distribution of proprietary programming
The accounting policies of the segments are the same as those described in
Note 1. The Group's management evaluates the performance of its segments and
allocates resources to them based on underlying sales growth and trading margin
improvement. There are no material inter-segment revenues.
The Group's segments are the same under UK GAAP and information with respect
to the segments is presented in Note 2 to the financial statements. The Group
has also separately disclosed information with respect to discontinued
operations.
DISCONTINUED OPERATIONS
In 1999, discontinued operations relate to the withdrawal of the Group from
the banking business following its disposal of its investment in Lazard on
March 3, 2000. In 1998, discontinued operations have been restated to include
the results of Lazard, as well as reflecting the withdrawal of the Group from
the consumer software business following its disposal of Mindscape Inc. in
March 1998, the withdrawal of the Group from the consumer magazine business
following its disposal of Pearson New Entertainment in April 1998 and the
withdrawal of the Group from the visitor attractions business following its
disposal of The Tussauds Group in October 1998. All disposals were accomplished
thruogh the sale of the various operations.
At December 31, 1999 and 1998, the carrying value of the investment in
Lazard on an UK GAAP basis was L149m and L111m, respectively. At December 31,
1998, due to the disposal dates, there were no assets and liabilities on the
balance sheet associated with Mindscape, Pearson New Entertainment and The
Tussauds Group. For the year ended December 31, 1999 and 1998, income from
operations on an UK GAAP basis for Lazard was L48m and L53m respectively,
including a profit in 1998 of L11m on the sale of a business. The gain arising
on the disposal of Lazard will be recognized in the 2000 results. The proceeds
on its disposal were received in 2000. For the year ended December 31, 1998 on a
UK GAAP basis, Mindscape, Pearson New Entertainment and The Tussauds Group had a
combined operating profit of L21m prior to disposal, and a total gain on
disposal of L215m was recognized. Total proceeds of L568m were received during
1998 upon the sale of Mindscape, Pearson New Entertainment and The Tussauds
Group.
The Group analyses turnover and operating profit between continuing and
discontinued operations. Under US GAAP, the operating profit from discontinued
operations would be shown on a separate line in the profit and loss statement
below income from continuing operations.
F-82
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
SIGNIFICANT ACQUISITIONS
During 1998, the Group acquired the Simon & Schuster educational,
business & professional and reference businesses (Simon & Schuster). The
following unaudited pro-forma information presents the results of operations of
the Group as if the acquisition had taken place on January 1, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
------------------------------
<S> <C>
Sales (Lm)................................................. 3,368
Profit for the financial year (Lm)......................... 301
Basic earnings per equity share............................ 51.0p
Diluted earnings per equity share.......................... 50.4p
</TABLE>
The Group's 1999 results consolidate Simon & Schuster for the full year, and
accordingly a pro-forma presentation is not necessary.
The unaudited pro-forma information has been prepared for comparative
purposes only and includes certain adjustments, such as additional amortization
expense as a result of goodwill and an increased interest expense on acquisition
debt. They do not purport to be indicative of the results of operations that
actually would have resulted if the acquisition had been effective at the
beginning of 1998.
REVENUE RECOGNITION
Pearson Education: Revenues are generally recognized when goods are shipped
to customers or services rendered, net of a provision for estimated returns.
FT Group: Subscription income is recorded as revenue as earned. Deferred
subscription revenue, which primarily represents amounts received from customers
in advance of newspaper delivery, is included in revenue over the subscription
term. Advertising revenue is recognized when the advertisement appears in the
newspaper.
Penguin: Revenues are generally recognized when goods are shipped to
customers or services rendered, net of a provision for estimated returns.
Pearson Television: Revenues from all television sources are recognized upon
availability of the film for telecast and when certain other conditions are met.
Television series initially produced for the networks and first-run syndication
are generally licensed to domestic and foreign markets concurrently. The more
successful series are later syndicated in domestic markets and in certain
foreign markets. The length of the revenue cycle for television series will vary
depending on the number of seasons a series remains in active production.
Revenues arising from television license agreements are recognized in the period
that the films or television series are available for telecast and when certain
other conditions are met. License agreements for the telecast of television
product in the broadcast network, syndicated television and cable television
markets are routinely entered into in advance of their available date for
telecast. Cash received in connection with such contractual rights for which
revenue is not yet recognizable is classified as deferred revenue.
F-83
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Because deferred revenue generally relates to contracts for the licensing of
television product which have already been produced, the recognition of revenue
for such completed product is principally only dependent upon the commencement
of the availability period for telecast under the terms of the related licensing
agreement and when certain other conditions are met.
All divisions: Online advertising revenue is recognized ratably during the
period in which the advertising is displayed and obligations are satisfied.
LEASE COMMITMENTS
The following is a summary of future minimum rental payments for all leases
with terms greater than one year:
<TABLE>
<CAPTION>
CAPITAL OPERATING
1999 LEASE LEASE
---- -------- ----------
LM LM
<S> <C> <C>
Fiscal year ending December 31,
2000........................................................ 7 90
2001........................................................ 5 81
2002........................................................ 2 72
2003........................................................ 1 64
2004........................................................ 1 52
Thereafter.................................................. 1 397
-- ---
Total minimum lease payments................................ 17 756
-- ---
(Less) Interest element..................................... (2) N/a
-- ---
Present value of net minimum lease payments................. 15 N/a
== ===
</TABLE>
<TABLE>
<CAPTION>
CAPITAL OPERATING
1998 LEASE LEASE
---- -------- ----------
LM LM
<S> <C> <C>
Fiscal year ending December 31,
1999........................................................ 10 89
2000........................................................ 6 71
2001........................................................ 3 64
2002........................................................ 1 56
2003........................................................ 1 52
Thereafter.................................................. - 364
-- ---
Total minimum lease payments................................ 21 696
-- ---
(Less) Interest element..................................... (2) N/a
-- ---
Present value of net minimum lease payments................. 19 N/a
== ===
</TABLE>
The total operating lease expense for 1999 is L95m (1998: L62m).
F-84
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
BORROWINGS
The weighted average interest rate on short-term borrowings outstanding was
5.5% and 6.4% as at December 31, 1999 and 1998, respectively.
The Group's debt matures as follows
<TABLE>
<CAPTION>
1999
--------
LM
<S> <C>
Due in:
2000........................................................ 47
2001........................................................ 155
2002........................................................ 590
2003........................................................ 561
2004........................................................ 466
Thereafter.................................................. 504
-----
Total....................................................... 2,323
=====
</TABLE>
The Group was in compliance with all debt covenants as at December 31, 1999
and 1998.
FIXED ASSETS
Fully depreciated assets still being utilised by the Group have the
following historical cost values:
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
Freehold buildings.......................................... 2 5
Long lease property......................................... 1 1
Short lease property........................................ 4 -
Plant & machinery........................................... 52 45
Fixtures & fittings......................................... 34 68
-- ---
Total....................................................... 93 119
== ===
</TABLE>
In 1998 there was one property which was not being utilised. Its net book
value was L15m. There was no such facility in 1999.
F-85
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
COMPUTER SOFTWARE COSTS
The following table sets forth the amount of computer software costs
capitalized in plant & machinery.
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
Cost at December 31......................................... 89 58
Depreciation at December 31................................. (38) (31)
--- ---
Net book value at December 31............................... 51 27
=== ===
Depreciation charged in the year............................ 7 5
</TABLE>
CONSOLIDATION
The consolidated financial statements include the accounts of the Group and
majority-owned and controlled subsidiaries. Under UK GAAP, the investments in
companies in which the Group is unable to exercise control but has the ability
to exercise significant influence over operating and financial policies are
accounted for by the equity method, which is consistent with the equity method
under US GAAP. Accordingly, the Group's share of the net earnings of these
companies is included in consolidated net income. The investments in other
companies are carried at cost or fair value, as appropriate. Inter-company
accounts and transactions are eliminated upon consolidation.
ALLOWANCE FOR DOUBTFUL RECEIVABLES
The Group has recorded an allowance for doubtful receivables as at
December 31,1999 of L463m (1998: L401m) of which L456m (1998: L392m) is in
respect of receivables due within one year.
ADVERTISING COSTS
The Group maintains an accounting policy of expensing advertising costs as
incurred.
The Group recorded advertising costs during the year ended December 31, 1999
and 1998 of L146m and L112m, respectively.
STOCKS
Stocks are valued at the lower of cost and net realizable value. Cost is
calculated on a first in first out basis by reference to the invoiced value of
supplies and attributable costs of bringing stocks to their present location and
condition. Net realizable value is the estimated market value less selling
costs.
F-86
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
EXCEPTIONAL ITEMS
Exceptional profits or losses on the sale of fixed assets and investments,
businesses and associates do not meet the definition of "extraordinary" under US
GAAP and, accordingly, are classified as operating items.
TOTAL ASSETS AND TOTAL LIABILITIES
US GAAP requires that total assets and total liabilities are disclosed.
Total assets and total liabilities under UK GAAP are shown below.
<TABLE>
<CAPTION>
1999 1998
-------- --------
LM LM
<S> <C> <C>
Total assets................................................ 5,350 5,317
Total liabilities........................................... 4,029 4,269
</TABLE>
USE OF ESTIMATES
Management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenue and expenses. Accounting
estimates have been used in these financial statements to determine reported
amounts, including realizability, of useful lives of tangible and intangible
assets, income taxes and other items. Actual results could differ from those
estimates.
COMPANIES ACT 1985
The Consolidated Financial Statements do not constitute "statutory accounts"
within the meaning of the Companies Act 1985 of Great Britain for any of the
periods presented. Statutory accounts for the years ended December 31, 1999,
1998 and 1997 have been filed with the United Kingdom's Registrar of Companies.
The auditors have reported on these accounts. Their reports were unqualified and
did not contain statements under Section 237 (2) or (3) of that Act.
These Consolidated Financial Statements include all material disclosures
required by generally accepted accounting principles in the United Kingdom
including those Companies Act 1985 disclosures relating to the profit and loss
account and balance sheet items.
RECENTLY ISSUED ACCOUNTING STANDARDS
FRS 15 TANGIBLE FIXED ASSETS sets out the requirements for accounting for
the initial measurement, valuation and depreciation of tangible fixed assets.
Valuations remain optional, but if valuations are performed then all assets of
the same class should be revalued and revaluation should be kept current. FRS 15
must be adopted for accounting periods ending on or after March 3, 2000, and
accordingly will be adopted in Pearson's interim statement as at and for the
period ending June 30, 2000. The implementation of FRS 15 is not expected to
have a material impact on either the results of operations or the disclosures.
FRS 16 CURRENT TAX discusses the recognition and disclosure of current tax,
in particular withholding tax and tax credits. The most significant change
introduced by FRS 16 is that dividends
F-87
<PAGE>
PEARSON PLC
NOTES TO THE ACCOUNTS (CONTINUED)
34 SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
received from UK companies should no longer be grossed up for the imputed tax
credit, but should instead be recorded at the amount received or receivable. The
effect of applying FRS 16 for the first time should be treated as a change in
accounting policy. FRS 16 must be adopted for accounting periods ending on or
after March 3, 2000, and accordingly will be adopted in Pearson's interim
statement as at and for the period ending June 30, 2000. The implementation of
FRS 16 is not expected to have a material impact on the results of operations.
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") 101
REVENUE RECOGNITION IN FINANCIAL STATEMENTS was issued on December 6, 1999 and
provides an interpretation of when the revenue recognition criteria have been
met. If a transaction is within the scope of specific authoritative literature
that provides revenue recognition guidance, that literature should continue to
be applied. However, in the absence of authoritative literature addressing a
specific arrangement or a specific industry, SAB 101 is designed to provide
additional guidance as to the criteria that will be applied by the SEC. SAB 101
is to be adopted in the second quarter of the financial year beginning after
December 15, 1999 (financial year 2000 for Pearson). Pearson has complied with
SAB 101 for the period ending December 31, 1999.
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, requires that, upon adoption, all
derivative instruments (including certain derivative instruments embedded in
other contracts) be recognized in the balance sheet at fair value, and that
changes in such fair values be recognized in earnings unless specific hedging
criteria are met. Changes in the values of derivatives that meet these hedging
criteria will ultimately offset related earnings effects of the hedged items;
effects of certain changes in fair value are recorded in equity pending
recognition in earnings. For US GAAP purposes the Group's derivative instruments
did not qualify for hedge accounting in 1999 or 1998. Accordingly, the adoption
of SFAS133 should not have a materially different effect than that shown in the
US GAAP reconciliation.
F-88
<PAGE>
PEARSON PLC
PRINCIPAL SUBSIDIARIES AND ASSOCIATES
AS AT DECEMBER 31, 1999
SUBSIDIARIES
The principal operating subsidiaries are listed below.
They operate mainly in the countries of incorporation or registration, the
investments are in equity share capital and they are all 100% owned unless
stated otherwise.
<TABLE>
<CAPTION>
COUNTRY OF
INCORPORATION OR
REGISTRATION
----------------
<S> <C>
FT GROUP
Financial Times Group Ltd*.................................. England
Financial Times Business Ltd................................ England
Les Echos SA................................................ France
Recoletos Compania Editorial SA (99.6%)..................... Spain
PEARSON EDUCATION
Addison Wesley Longman Inc.................................. US
Addison Wesley Educational Publishers Inc................... US
Macmillan USA Inc........................................... US
Pearson Education Ltd....................................... England
Prentice Hall Inc........................................... US
THE PENGUIN GROUP
Penguin Putnam Inc.......................................... US
The Penguin Publishing Co Ltd............................... England
Penguin Books Australia Ltd................................. Australia
PEARSON TELEVISION
Pearson Television Ltd*..................................... England
Pearson Television Productions Ltd.......................... England
Pearson Television North America Inc........................ US
Pearson Television International Ltd........................ England
</TABLE>
------------------------
*Direct investment of Pearson plc
F-89
<PAGE>
PEARSON PLC
PRINCIPAL SUBSIDIARIES AND ASSOCIATES (CONTINUED)
AS AT DECEMBER 31, 1999
ASSOCIATES
<TABLE>
<CAPTION>
COUNTRY OF
INCORPORATION BENEFICIAL CLASS OF SHARE ACCOUNTING
OR REGISTRATION INTEREST SHARE CAPITAL YEAR END
--------------- ---------- ------------- -------- -----------
% LM
<S> <C> <C> <C> <C> <C>
FT GROUP
The Economist Newspaper Ltd..... England 50 Ord 5p 1.1 March
100 'B' 5p 0.1
Nil 'A' 5p
Nil Trust 5p -
PEARSON TELEVISION
Channel 5 Television Group England 20.0 Ord 1p voting 0.8 December
Ltd...........................
25.0 Ord 1p 4.0
non-voting
19.2 Preference -
1.7 Deferred -
</TABLE>
The principal partnerships are shown on page F-27.
Subsequent to the year end, the beneficial interest in Channel 5 Television
Group Ltd increased (see note 31).
F-90
<PAGE>
PEARSON PLC
INTERIM RESULTS FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
The financial information included on the following pages F-92 through F-100
represents the consolidated financial position of Pearson plc and its
subsidiaries as of June 30, 2000 and the results of their operations and changes
in their financial position (cash flows) prepared in accordance with UK GAAP.
This financial information is included because it is publicly available in the
UK and has been publicly distributed to shareholders in the UK and provided to
the London stock exchange. This financial information has been prepared in
accordance with UK GAAP and has not been reconciled to accounting principles
generally accepted in the US.
F-91
<PAGE>
PEARSON PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1999
2000 HALF YEAR FULL YEAR
HALF YEAR RESTATED RESTATED
NOTE --------- --------- ---------
LM
LM LM
<S> <C> <C> <C> <C>
SALES....................................................... 2
Continuing operations....................................... 1,490 1,306 3,332
Acquisitions................................................ 55 - -
----- ----- -----
TOTAL SALES................................................. 1,545 1,306 3,332
OPERATING PROFIT............................................ 2
Continuing operations--group................................ (13) 13 247
Acquisitions--group......................................... (6) - -
----- ----- -----
Total operating (loss)/profit--group........................ (19) 13 247
----- ----- -----
Share of operating profit of associates and joint ventures:
Continuing operations....................................... 5 12 23
Acquisitions................................................ (5) - -
----- ----- -----
- 12 23
Discontinued operations..................................... 8 21 48
----- ----- -----
TOTAL SHARE OF OPERATING PROFIT OF ASSOCIATES AND JOINT
VENTURES.................................................. 8 33 71
===== ===== =====
Total operating profit analysed between:
Operating profit before internet enterprises, goodwill
amortisation and other items.............................. 156 133 588
Internet enterprises........................................ (84) (7) (39)
Goodwill amortisation....................................... (72) (63) (131)
Other items................................................. (11) (17) (100)
----- ----- -----
TOTAL OPERATING (LOSS)/PROFIT............................... (11) 46 318
Continuing operations:
Profit on sale of fixed assets and investments.............. 3 2 22 349
(Loss) on sale of businesses and associates................. 4 (15) (17) (44)
Discontinued operations:
Profit on sale of businesses and associates................. 4 231 - -
218 5 305
----- ----- -----
Profit on sale of businesses and associates by an
associate--continuing operations.......................... - - 1
PROFIT BEFORE INTEREST...................................... 207 51 624
NET FINANCE COSTS
Net interest payable--group................................. (67) (70) (145)
Net interest payable--associates and joint ventures......... (1) (1) (2)
Arrangement fee............................................. 5 (16) - -
----- ----- -----
(84) (71) (147)
----- ----- -----
PROFIT/(LOSS) BEFORE TAXATION............................... 123 (20) 477
Taxation.................................................... 7 (32) (18) (177)
----- ----- -----
Profit/(loss) after taxation................................ 91 (38) 300
Equity minority interests................................... (3) (3) (6)
----- ----- -----
PROFIT/(LOSS) FOR THE FINANCIAL PERIOD...................... 88 (41) 294
DIVIDENDS ON EQUITY SHARES.................................. (58) (54) (138)
----- ----- -----
PROFIT/(DEFICIT) RETAINED................................... 30 (95) 156
===== ===== =====
ADJUSTED EARNINGS PER EQUITY SHARE BEFORE INTERNET
ENTERPRISES............................................... 6 10.0p 7.1p 53.3p
ADJUSTED (LOSS)/EARNINGS PER EQUITY SHARE AFTER INTERNET
ENTERPRISES............................................... 6 (0.6)p 6.3p 48.5p
EARNINGS/(LOSS) PER EQUITY SHARE............................ 6 14.2p (6.6)p 48.2p
DILUTED EARNINGS/(LOSS) PER EQUITY SHARE.................... 6 13.8p (6.5)p 47.5p
DIVIDENDS PER EQUITY SHARE.................................. 8 9.2p 8.6p 22.5p
===== ===== =====
</TABLE>
------------------------------
1999 has been restated to reflect the adoption of FRS16 "Current Tax".
The results for the 1999 full year are an abridged version of the full accounts
which have received an unqualified audit report from the auditors and have been
filed with the Registrar of Companies. First half figures are neither audited
nor reviewed.
F-92
<PAGE>
PEARSON PLC
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets........................................... 3,018 2,340 2,457
Tangible assets............................................. 453 435 405
Investments:
Associates.................................................. 289 208 234
Other....................................................... 191 291 99
------ ------ ------
3,951 3,274 3,195
------ ------ ------
CURRENT ASSETS
Stocks...................................................... 945 724 691
Debtors..................................................... 1,233 1,093 1,132
Investments................................................. 3 5 4
Cash at bank and in hand.................................... 369 351 328
------ ------ ------
2,550 2,173 2,155
------ ------ ------
CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR
Short-term borrowing........................................ (902) (594) (47)
Other creditors............................................. (1,356) (1,162) (1,441)
------ ------ ------
(2,258) (1,756) (1,488)
------ ------ ------
NET CURRENT ASSETS.......................................... 292 417 667
------ ------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 4,243 3,691 3,862
CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Medium and long term borrowing.............................. (2,011) (2,297) (2,276)
Other creditors............................................. (58) (43) (32)
------ ------ ------
(2,069) (2,340) (2,308)
PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation........................................... (17) (22) (21)
Other provisions for liabilities and charges................ (213) (222) (206)
------ ------ ------
NET ASSETS.................................................. 1,944 1,107 1,327
------ ------ ------
CAPITAL AND RESERVES
Called up share capital..................................... 156 153 153
Share premium account....................................... 774 504 517
Profit and loss account..................................... 901 413 651
------ ------ ------
EQUITY SHAREHOLDERS' FUNDS.................................. 1,831 1,070 1,321
EQUITY MINORITY INTERESTS................................... 113 37 6
------ ------ ------
1,944 1,107 1,327
====== ====== ======
</TABLE>
F-93
<PAGE>
PEARSON PLC
STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Profit/(loss) for the financial period...................... 88 (41) 294
Other net gains and losses recognised in reserves:
Currency translation differences............................ 97 71 36
----- ----- -----
TOTAL RECOGNISED GAINS RELATING TO THE PERIOD............... 185 30 330
===== ===== =====
</TABLE>
RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS
FOR THE SIX MONTHS TO JUNE 30, 2000
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Profit/(loss) for the financial period...................... 88 (41) 294
Dividends on equity shares.................................. (58) (54) (138)
----- ----- -----
30 (95) 156
Currency translation differences............................ 97 71 36
Goodwill written back....................................... 126 40 63
Shares issued............................................... 257 6 18
----- ----- -----
Net movement for the period................................. 510 22 273
Equity shareholders' funds at beginning of the period....... 1,321 1,048 1,048
----- ----- -----
EQUITY SHAREHOLDERS' FUNDS AT END OF THE PERIOD............. 1,831 1,070 1,321
===== ===== =====
</TABLE>
F-94
<PAGE>
PEARSON PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
NOTE --------- --------- ---------
LM LM LM
<S> <C> <C> <C> <C>
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES......................................... 9 (200) (52) 433
------ ------ ------
DIVIDENDS FROM ASSOCIATES AND JOINT VENTURES......... 43 31 44
------ ------ ------
Interest received.................................... 23 30 41
Interest paid........................................ (105) (98) (182)
Debt issue costs..................................... - - (5)
Dividends paid to minority interests................. - - (1)
------ ------ ------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE...... (82) (68) (147)
------ ------ ------
TAXATION............................................. (30) (33) (156)
------ ------ ------
Purchase of tangible fixed assets.................... (65) (41) (102)
Sale of tangible fixed assets........................ 8 10 36
Purchase of investments.............................. (90) (19) (24)
Sale of investments.................................. 3 108 624
------ ------ ------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT......... (144) 58 534
------ ------ ------
Purchase of subsidiary undertakings.................. (482) (17) (249)
Net debt acquired with subsidiary undertakings....... (19) - -
Purchase of associates and joint ventures............ (88) (48) (54)
Sale of subsidiary undertakings...................... 3 31 44
Net cash disposed with subsidiary undertakings....... - (3) (3)
Sale of associates and joint ventures................ 394 12 12
------ ------ ------
ACQUISITIONS AND DISPOSALS........................... (192) (25) (250)
------ ------ ------
EQUITY DIVIDENDS PAID................................ (87) (79) (132)
------ ------ ------
NET CASH (OUTFLOW)/INFLOW BEFORE MANAGEMENT OF LIQUID
FINANCING RESOURCES AND FINANCING.................. (692) (168) 326
------ ------ ------
Liquid resources acquired............................ (49) (9) (9)
Liquid resources disposed............................ 44 10 10
Collateral deposit placed............................ (61) - -
------ ------ ------
MANAGEMENT OF LIQUID RESOURCES....................... (66) 1 1
------ ------ ------
Issue of equity share capital........................ 257 6 18
Capital element of finance lease rentals............. (4) (5) (11)
Loan facility repaid................................. (676) (326) (1,112)
4.625% [EURO]uro Bonds 2004 advanced................. - - 358
7% Sterling Bonds 2014 advanced...................... - - 250
6.125% [EURO]uro Bonds 2007 advanced................. 368 -- --
Loan notes advanced.................................. 131 -- --
Net movement in other borrowings..................... 597 525 202
------ ------ ------
FINANCING............................................ 673 200 (295)
------ ------ ------
(DECREASE)/INCREASE IN CASH IN THE PERIOD............ (85) 33 32
====== ====== ======
</TABLE>
F-95
<PAGE>
PEARSON PLC
NOTES TO THE INTERIM RESULTS
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
1. BASIS OF PREPARATION
The interim results for the six months to June 30, 2000 have been prepared
in accordance with the accounting policies set out in the 1999 Annual Report.
FRS15 "Tangible Fixed Assets' has been adopted. FRS16 "Current Tax' has also
been adopted and comparative figures have been restated to reflect that UK
dividend income is now presented net of UK tax credits.
2. SECTOR ANALYSIS
<TABLE>
<CAPTION>
SALES
---------------------------------
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Pearson Education........................................... 647 554 1,725
FT Group.................................................... 408 330 687
The Penguin Group........................................... 326 263 565
Pearson Television.......................................... 164 159 355
----- ----- -----
Continuing operations....................................... 1,545 1,306 3,332
===== ===== =====
</TABLE>
Sales in respect of internet enterprises, the group's discrete internet
operations, are included within the FT Group L16m (1999 half year: L2m; 1999
full year: L7m).
<TABLE>
<CAPTION>
OPERATING PROFIT OPERATING PROFIT
--------------------------------- ---------------------------------
(BEFORE INTERNET ENTERPRISES, (AFTER INTERNET ENTERPRISES,
GOODWILL AMORTISATION AND GOODWILL AMORTISATION AND
OTHER ITEMS) OTHER ITEMS)
--------------------------------- ---------------------------------
2000 1999 1999 2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR HALF YEAR HALF YEAR FULL YEAR
--------- --------- --------- --------- --------- ---------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Pearson Education.......... (26) (38) 257 (108) (116) 36
FT Group................... 109 86 150 35 77 103
The Penguin Group.......... 33 31 65 25 31 64
Pearson Television......... 32 33 68 29 33 67
---- ---- ---- ---- ---- ----
Continuing operations...... 148 112 540 (19) 25 270
Discontinued operations.... 8 21 48 8 21 48
---- ---- ---- ---- ---- ----
156 133 588 (11) 46 318
==== ==== ==== ==== ==== ====
</TABLE>
The results of internet enterprises are included within Pearson Education
L19m (1999 half year: Lnil; 1999 full year: L3m), within FT Group L64m (1999
half year: L7m; 1999 full year: L36m) and within Pearson Television L1m (1999
half year: Lnil; 1999 full year: Lnil).
Other items comprises exceptional items of L11m (1999 half year L15m; 1999
full year L95m) and Year 2000 compliance costs of Lnil (1999 half year L2m; 1999
full year L5m). Exceptional items comprise integration costs of L8m (1999 half
year L15m; 1999 full year L95m) following the acquisition of Simon & Schuster in
1998 which all relate to the Pearson Education business sector and integration
costs of L3m following the acquisition of Dorling Kindersley in May 2000 which
all
F-96
<PAGE>
PEARSON PLC
NOTES TO THE INTERIM RESULTS (CONTINUED)
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
2. SECTOR ANALYSIS (CONTINUED)
relate to the Penguin Group business sector. Discontinued operations relate to
the withdrawal of the Group from the banking business following its disposal of
Lazard on March 3, 2000.
Included in the analysis of operating profit above are the following amounts
in respect of associates and joint ventures:
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Pearson Education........................................... 4 4 6
FT Group.................................................... (8) 7 14
Pearson Television.......................................... 4 1 3
Continuing operations....................................... - 12 23
Discontinued operations..................................... 8 21 48
----- ----- -----
8 33 71
===== ===== =====
</TABLE>
3. PROFIT ON SALE OF FIXED ASSETS AND INVESTMENTS
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Profit on disposal of interest in BSB Holdings Ltd.......... - 16 345
Loss on sale of fixed assets relating to the Simon &
Schuster acquisition...................................... - - (3)
Net profit on sale of other investments and property
interests................................................. 2 6 7
----- ----- -----
Continuing operations....................................... 2 22 349
----- ----- -----
Taxation.................................................... - (3) (90)
===== ===== =====
</TABLE>
4. (LOSS)/PROFIT ON SALE OF BUSINESSES AND ASSOCIATES
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Loss on sale of Extel research products business............ - (16) (19)
Loss on closure of Simon & Schuster businesses.............. - (3) (12)
Net (loss)/profit on sale of other businesses............... (15) 2 (13)
----- ----- -----
Continuing operations....................................... (15) (17) (44)
----- ----- -----
Profit on sale of Lazard--discontinued operations........... 231 - -
----- ----- -----
Taxation.................................................... (31) (3) 5
===== ===== =====
</TABLE>
5. ARRANGEMENT FEE
The amortisation of an arrangement fee in respect of a borrowing facility
has been accelerated due to the early redemption of the facility.
F-97
<PAGE>
PEARSON PLC
NOTES TO THE INTERIM RESULTS (CONTINUED)
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
6. EARNINGS AND ADJUSTED EARNINGS PER EQUITY SHARE
In order to show results from operating activities on a comparable basis two
adjusted earnings per equity share are presented. Firstly, an adjusted earnings
per equity share is presented which excludes profits or losses on the sale of
fixed assets and investments, businesses and associates (see notes 3 and 4),
Year 2000 compliance costs, integration costs in respect of the acquisitions of
Simon & Schuster and Dorling Kindersley and the accelerated amortisation of a
financing arrangement fee. Goodwill amortisation has also been excluded from the
adjusted earnings calculation following the prospective implementation of FRS10
"Goodwill and Intangible Assets' in 1998. Due to a significant level of
expenditure on new internet enterprises, a second adjusted earnings per equity
share is presented in which the results of these are also excluded from
earnings.
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Profit/(loss) for the financial period...................... 88 (41) 294
Adjustments:
(Profit) on sale of fixed assets and investments: continuing
operations................................................ (2) (22) (349)
Loss on sale of businesses and associates: continuing
operations................................................ 15 17 44
(Profit) on sale of businesses and associates: discontinued
operations................................................ (231) -
(Profit) on sale of businesses and associates by an
associate:
Continuing Operations....................................... - - (1)
Internet enterprises........................................ 84 7 39
Interest on internet enterprises............................ 2 - -
Minority share of internet enterprises...................... (2) - -
Goodwill amortisation....................................... 72 63 131
Simon & Schuster integration costs.......................... 8 15 95
Dorling Kindersley integration costs........................ 3 - -
Arrangement fee............................................. 16 - -
Year 2000 compliance costs.................................. - 2 5
Taxation on above items..................................... 9 2 67
----- ----- -----
Adjusted earnings before internet enterprises............... 62 43 325
----- ----- -----
Internet enterprises........................................ (84) (7) (39)
Interest on internet enterprises............................ (2) - -
Minority share of internet enterprises...................... 2 - -
Taxation on internet enterprises............................ 18 2 10
----- ----- -----
Adjusted (loss)/earnings after internet enterprises......... (4) 38 296
----- ----- -----
Profit/(loss) for the financial period...................... 88 (41) 294
Tax on the conversion of ordinary shares.................... (1) - (1)
----- ----- -----
Diluted earnings............................................ 87 (41) 293
----- ----- -----
Weighted average number of equity shares (millions)
--for earnings and adjusted earnings...................... 620.4 609.7 610.2
Effect of dilutive share options............................ 8.2 6.8 7.0
----- ----- -----
Weighted average number of equity shares (millions)
--for diluted earnings.................................... 628.6 616.5 617.2
----- ----- -----
Adjusted earnings per equity share before internet
enterprises............................................... 10.0p 7.1p 53.3p
Adjusted (loss)/earnings per equity share after internet
enterprises............................................... (0.6)p 6.3p 48.5p
Earnings/(loss) per equity share............................ 14.2p (6.6)p 48.2p
Diluted earnings/(loss) per equity share.................... 13.8p (6.5)p 47.5p
===== ===== =====
</TABLE>
F-98
<PAGE>
PEARSON PLC
NOTES TO THE INTERIM RESULTS (CONTINUED)
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
7. TAXATION
The tax rate provided in the profit and loss account for the half year is
based on the estimated effective rate for the full year and is analysed as
follows:
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
% % %
--------- --------- ---------
<S> <C> <C> <C>
United Kingdom tax rate..................................... 30.0 30.2 30.2
Effect of utilisation of tax losses in the USA.............. (4.5) (10.6) (7.7)
Other items................................................. (0.5) 5.4 2.5
----- ----- -----
Tax rate reflected in adjusted earnings..................... 25.0 25.0 25.0
----- ----- -----
Effect of profits/(losses) excluded from adjusted
earnings.................................................. 1.0 n/a 12.5
----- ----- -----
Tax rate reflected in earnings.............................. 26.0 n/a 37.5
----- ----- -----
</TABLE>
Taxation is analysed as:
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
Parent and subsidiaries..................................... 28 10 162
Associates.................................................. 4 8 15
----- ----- -----
32 18 177
===== ===== =====
</TABLE>
The group continues to have substantial tax losses available in the US which
are not recognised in the accounts and hence the tax rate reflected in adjusted
earnings is lower than the UK tax rate.
8. DIVIDENDS
The directors have declared an interim dividend of 9.2p per equity share,
payable on October 27, 2000 to shareholders on the register at the close of
business on August 11, 2000.
F-99
<PAGE>
PEARSON PLC
NOTES TO THE INTERIM RESULTS (CONTINUED)
FOR THE SIX MONTHS TO JUNE 30, 2000
(UNAUDITED)
9. NOTE TO CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR
--------- --------- ---------
LM LM LM
<S> <C> <C> <C>
RECONCILIATION OF OPERATING (LOSS)/PROFIT TO NET CASH
(OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES
Total operating (loss)/profit............................... (11) 46 318
Share of profit of associates and joint ventures............ (8) (33) (71)
Depreciation charges........................................ 44 41 82
Goodwill amortisation....................................... 70 63 130
(Increase) in stocks........................................ (137) (69) (57)
Decrease/(increase) in debtors.............................. 37 46 (71)
(Decrease)/increase in creditors............................ (199) (114) 127
(Decrease) in operating provisions.......................... (6) (29) (33)
Other and non-cash items.................................... 10 (3) 8
----- ----- -----
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES......... (200) (52) 433
Purchase of fixed assets and finance lease payments......... (69) (46) (113)
Sale of operating tangible fixed assets..................... 5 2 24
Dividends from associates and joint ventures................ 43 31 44
Other....................................................... 3 4 8
----- ----- -----
OPERATING CASH FLOW......................................... (218) (61) 396
----- ----- -----
Analysed as:
Operating cash flow before internet enterprises and other
items..................................................... (104) (8) 540
Cash effect of other items.................................. (26) (49) (110)
Cash effect of internet enterprises......................... (88) (4) (34)
----- ----- -----
OPERATING CASH FLOW......................................... (218) (61) 396
===== ===== =====
</TABLE>
10. EXCHANGE RATES
Pearson earns a significant proportion of its sales and profits in overseas
currencies, the most prominent being the US dollar and the Euro. The relevant
rates are as follows:
<TABLE>
<CAPTION>
L VERSUS US$ L VERSUS EURO
--------------------------------- ---------------------------------
2000 1999 1999 2000 1999 1999
HALF YEAR HALF YEAR FULL YEAR HALF YEAR HALF YEAR FULL YEAR
--------- --------- --------- --------- --------- ---------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Average for operating
profits................... 1.56 1.61 1.61 1.65 1.50 1.53
Period end rate............. 1.51 1.58 1.61 1.58 1.53 1.61
</TABLE>
F-100
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Viacom Inc.:
In our opinion, the accompanying carve-out balance sheets and the related
carve-out statements of operations and of cash flows presents fairly, in all
material respects, the financial position of Simon & Schuster (Excluding
Consumer), as defined in Note 1 to the financial statements (the "Company"), at
December 31, 1997, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion expressed above.
PricewaterhouseCoopers LLP, New York
June 17, 1998
F-101
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
CARVE-OUT STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1, 1998
THROUGH YEAR ENDED
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Revenues......................................... 1,663 1,915 1,784 1,631
Expenses
Operating...................................... (700) (757) (689) (573)
Selling, general and administrative............ (872) (851) (816) (781)
Depreciation and amortization (note 1)......... (142) (145) (135) (126)
------ ------ ------ ------
TOTAL EXPENSES................................... (1,714) (1,753) (1,640) (1,480)
------ ------ ------ ------
Operating (loss)/income.......................... (51) 162 144 151
Other income/(expense)
Net interest income/(expense)(note 3).......... 1 (6) (5) (6)
Other items, net (note 9)...................... (15) (8) 8 (1)
------ ------ ------ ------
(Loss)/earnings before income taxes.............. (65) 148 147 144
Provision for income taxes (note 6).............. (2) (82) (80) (78)
------ ------ ------ ------
NET (LOSS)/EARNINGS.............................. (67) 66 67 66
====== ====== ====== ======
</TABLE>
See notes to carve-out financial statements.
F-102
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
CARVE-OUT BALANCE SHEET
<TABLE>
<CAPTION>
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Assets
Current assets
Cash........................................... 41 35 31 45
Receivables, less allowances for sales returns
and doubtful accounts of $181 (1998), $204
(1997), $176 (1996) and $162 (1995).......... 473 545 502 407
Inventories (note 1)........................... 287 284 278 319
Prepaid and other current assets............... 125 98 90 76
------ ------ ------ ------
TOTAL CURRENT ASSETS............................. 926 962 901 847
------ ------ ------ ------
Property and equipment, net (note 1)............. 163 165 171 160
Intangibles, net (note 1)........................ 2,851 2,941 3,011 3,052
Prepublication costs, net of accumulated
amortization of $423 (1998), $312 (1997), $240
(1996) and $187 (1995) (note 1)................ 326 325 314 270
Other assets..................................... 114 124 89 105
------ ------ ------ ------
4,380 4,517 4,486 4,434
====== ====== ====== ======
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities
Accounts payable............................... 123 223 229 193
Accrued expenses............................... 103 78 96 91
Royalty payable................................ 74 87 83 78
Subscription liability......................... 44 44 43 38
Accrued compensation........................... 227 192 183 176
Other current liabilities...................... 72 71 83 126
Current portion of long-term debt (note 3)..... 22 26 7 41
------ ------ ------ ------
TOTAL CURRENT LIABILITIES........................ 665 721 724 743
Long-term debt (note 3).......................... 23 27 22 14
Deferred income taxes (note 6)................... 14 21 19 -
Other liabilities................................ 13 5 15 8
Commitments and contingencies (note 7)
Viacom equity investment (note 4)................ 3,665 3,743 3,706 3,669
------ ------ ------ ------
4,380 4,517 4,486 4,434
====== ====== ====== ======
</TABLE>
See notes to carve-out financial statements.
F-103
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
CARVE-OUT STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, 1998
THROUGH YEAR ENDED
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Operating activities
Net earnings.......................................... (67) 66 67 66
Adjustments to reconcile net earnings to net cash flow
from operating activities
Gain on sale of investment.......................... - - (8) -
Depreciation and amortization....................... 142 145 135 126
Decrease/(increase) in receivables.................. 62 (46) (90) (19)
(Increase)/decrease in inventories.................. (4) (14) 37 (98)
(Increase)/in other assets.......................... (40) (54) (34) (31)
Increase in prepublication costs.................... (1) (13) (50) (49)
(Decrease)/increase in accounts payable and other
liabilities....................................... (51) (29) 34 33
---- ---- ---- ---
NET CASH FLOW FROM OPERATING ACTIVITIES................. 41 55 91 28
---- ---- ---- ---
Investing activities
Capital expenditures.................................. (28) (34) (31) (42)
Proceeds from dispositions............................ 2 14 42 10
Acquisitions, net of cash acquired.................... - (13) (49) (54)
Proceeds from sale of buildings and equipment......... - 16 6 5
---- ---- ---- ---
NET CASH FLOW FROM INVESTING ACTIVITIES................. (26) (17) (32) (81)
---- ---- ---- ---
Financing activities
Net distributions to Viacom........................... (76) (157) (147) (43)
Amounts paid by Viacom on behalf of Publishing
(excluding consumer)................................ 75 134 116 104
Principal payment on capital lease obligations........ (1) (11) (4) (2)
Repayments of long-term debt, net..................... (7) - (38) -
---- ---- ---- ---
NET CASH FLOW FROM FINANCING ACTIVITIES................. (9) (34) (73) 59
---- ---- ---- ---
Net increase/(decrease) in cash......................... 6 4 (14) 6
Cash at beginning of year............................... 35 31 45 39
---- ---- ---- ---
Cash at end of year..................................... 41 35 31 45
==== ==== ==== ===
Noncash investing and financing activities
Property and equipment acquired under capitalized
leases.............................................. 13 21 16 11
---- ---- ---- ---
</TABLE>
See notes to carve-out financial statements.
F-104
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Simon & Schuster (Excluding Consumer) consists of Simon & Schuster and its
subsidiaries, which are wholly-owned by Viacom Inc. ("Viacom"), excluding the
Consumer division (the "Company"). The Company publishes and distributes books,
audiobooks, software (including CD-ROM products, educational textbooks,
supplemental educational materials, multimedia curricula, and information and
reference materials for schools, businesses and professionals. The Company's
flagship imprints include Allyn & Bacon, Computer Curriculum Corporation,
Prentice Hall, Silver Burdett Ginn and Macmillan-Registered Trademark- USA. The
Company also distributes its products directly as well as through third parties
and delivers content and sells products on Internet Web sites operated by
various imprints or linked to individual titles. The Company operates
principally in one segment of business--the production, publication and sale of
educational and professional materials.
On May 17, 1998, Viacom entered into an agreement to sell the Company to
Pearson plc. for $4.6 billion in cash. Viacom will retain the Consumer division,
including the Simon & Schuster name. The transaction was completed on
November 27, 1998.
The accompanying carve-out financial statements and related notes reflect
the carve-out historical results of operations, financial position and cash
flows of the Company. These financial statements are not necessarily indicative
of results that would have occurred if the Company had been a separate
stand-alone entity during the periods presented or of future results of the
Company.
PRINCIPLES OF COMBINATION
The carve-out financial statement include the accounts of the Company and
all investments of more than 50% in subsidiaries. All significant intercompany
transactions with combined entities have been eliminated. Investments in
affiliated companies over which the Company has significant control or ownership
of more than 20% but less than or equal to 50% are accounted for under the
equity method. Investments of 20% or less are accounted for under the cost
method. Investments in affiliates are included in Other Assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could subsequently differ from those
estimates. The significant estimates that affect the financial statement
include, but are not limited to, book returns, doubtful accounts, recoverability
of advances to authors and recoverability of long-term assets such as
intangibles, prepublication costs and software developed for external use.
RETURNS RESERVES
A provision for estimated sales returns is made at time of sale is generally
based upon a percentage of gross sales using historical return rates.
F-105
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts charged to expense was $17m, $17m, $15m
and $12m for the period January 1, 1998 through November 27, 1998 and for the
three years ended December 31, 1997, respectively.
INVENTORIES
Inventories, which consists principally of paper, printing costs, binding
and in-bound freight costs and finished products are stated at the lower of cost
(first-in, first-out) or net realizable value. Inventory is comprised of the
following:
<TABLE>
<CAPTION>
JANUARY 1, 1998
THROUGH
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Raw materials......................................... 15 16 12 24
Work-in-process....................................... 25 23 24 38
Finished goods........................................ 247 245 242 257
---- ---- ---- ----
TOTAL................................................. 287 284 278 319
==== ==== ==== ====
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line basis over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Building and building improvements........... 40 years for building; 10 years for building
improvements
Leasehold improvements....................... lesser of useful life or lease term
Equipment and other.......................... 3 to 10 years
</TABLE>
F-106
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Balances of major classes of assets and allowances for depreciation and
amortization are as follows:
<TABLE>
<CAPTION>
JANUARY 1,
1998
THROUGH
NOVEMBER 27,
1998 DECEMBER 31,
------------ ------------------------------
(UNAUDITED) 1997 1996 1995
------------ -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Land...................................................... 7 7 18 19
Building and building improvements........................ 32 34 55 55
Leasehold improvements.................................... 20 20 17 12
Equipment and other....................................... 250 222 178 153
---- ---- ---- ----
TOTAL..................................................... 309 283 268 239
Less: allowances for depreciation and amortization....... (146) (118) (97) (79)
---- ---- ---- ----
Property and equipment, net............................... 163 165 171 160
==== ==== ==== ====
</TABLE>
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
capitalized. Depreciation expense, including capitalized lease and software
amortization, was $52m, $46m, $37m and $30m for the period January 1, 1998
through November 27, 1998 and for the three years ended December 31, 1997.
Property and equipment includes capital leases of $34m, $34m, $23m and $13m
at November 27, 1998, December 31, 1997, 1996 and 1995, respectively, net of
accumulated amortization of $32m, $18m, $8m and $4m, respectively. Amortization
expense related to capital leases was $14m, $10m, $5m and $2m for the period
January 1, 1998 through November 27, 1998 and for the three years ended
December 31, 1998.
In 1997, the Company sold its Englewood Cliffs, New Jersey facility
resulting in a gain of $5m. In 1996, the Company sold its Paramus, New Jersey
facility resulting in a gain of $2m.
F-107
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLES
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, 1998
THROUGH
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Goodwill......................................... 2,869 2,869 2,840 2,783
Publishing rights................................ 441 441 441 441
------ ------ ------ ------
TOTAL............................................ 3,310 3,310 3,281 3,224
Less: accumulated amortization................... (459) (369) (270) (172)
------ ------ ------ ------
Intangibles, net................................. 2,851 2,941 3,011 3,052
====== ====== ====== ======
</TABLE>
Publishing rights are amortized on a straight-line basis over the estimated
remaining economic life of the titles or contracts, which does not exceed
17 years.
The cost of acquired businesses in excess of the fair value of tangible
assets and liabilities acquired ("goodwill") is generally amortized using the
straight-line method over estimated useful lives of up to 40 years. Amortization
expense related to intangible assets was $90m, $99m, $98m and $96m for the
period January 1, 1998 through November 27, 1998 and for the three years ended
December 31, 1997.
PREPUBLICATION COSTS
Prepublication costs include principally art, composition, typesetting,
film, copy editing, proofreading and other nonrecurring preproduction costs
related to product development. Units that publish products with life cycles
longer than one year generally capitalize prepublication costs and amortize
these costs over the life of the product up to 5 years. Expense related to
prepublication costs, which is included in operating expenses, was $168m, $177m,
$134m and $105m for the period January 1, 1998 through November 27, 1998 and for
the three years ended December 31, 1997, respectively.
IMPAIRMENT EVALUATION
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting
standards for the evaluation and measurement of impairment of long-lived assets,
including identifiable intangibles and goodwill. There was no material effect on
the financial statements from the adoption of SFAS 121 because the Company's
prior impairment recognition practice was generally consistent with SFAS 121.
Under the provisions of SFAS 121, impairment is indicated when expected future
cash flows are less than the related assets' carrying value. Accordingly, when
indicators of impairment are present, the Company
F-108
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
evaluates the carrying value of the related asset, including goodwill, in
relation to the fair value and the carrying value of the underlying assets is
adjusted if the fair value is lower.
REVENUE RECOGNITION
Revenues are generally recognized in the period when merchandise is shipped.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's foreign business' assets and liabilities are translated at
exchange rates in effect at the balance sheet date, while results of operations
are translated at average exchange rates for the respective periods. The
resulting translation gains and losses are included as part of Viacom's equity
investment. Foreign currency transaction gains and losses have been included in
"Other items, net".
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred
income taxes are recorded to reflect the tax benefit and consequences of future
years differences between the tax bases of assets and liabilities and their
financial reporting basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 128, "Earnings per Share" which establishes standards for computing and
presenting earnings per share and is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Given the nature of
the capital structure of the combined entities that form the Company, earnings
per share data has not been presented.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130"), effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. The components of the Viacom Equity
Investment, which include certain components required to be displayed by
SFAS 130, are presented in note 4.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. In
February 1998, the FASB issued SFAS 132, "Employer's Disclosures about Pensions
and Other Post-Retirement Benefits" (SFAS 132"), which is effective for fiscal
years beginning after December 15, 1997. SFAS 132 standardizes the disclosure
requirements for pension and other post-retirement benefits and requires
additional information on benefit obligations and the fair value of plan assets.
Given the proposed sale of the Company and the nature of these financial
F-109
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
statements as described in note 1, the Company has not made an assessment
relative to the impct of SFAS 131 and SFAS 132.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for years beginning after June 15, 2000, as
amended. Given the sale of the Company as described in note 1, no assessment
relative to the impact of SFAS 133 has been made.
There are no other recently issued accounting pronouncements that are
anticipated to have a material impact on the Company.
UNAUDITED FINANCIAL INFORMATION
The unaudited financial information for the period January 1, 1998 through
November 27, 1998 has been prepared by management and includes all adjustments,
consisting of recurring entries which management believes necessary to present
fairly the financial position at November 27, 1998 and the results of operations
and cash flows for the period January 1, 1998 through November 27, 1998. The
results of operations for the period January 1, 1998 through November 27, 1998
are not necessarily indicative of the operating results to be expected for the
full year.
2. ACQUISITIONS AND DISPOSITIONS
In 1997, the Company acquired all the outstanding stock of Skylight
Training & Publishing Inc. for approximately $5m in cash and a note for $14m
payable from 1998 through 2002. In 1996, the Company acquired all the
outstanding stock of Invest Learning, a company which provides technology-based
adult basic skills training solutions for the adult education market, for
approximately $31m in cash. The acquisitions were accounted for as purchases and
the net assets and results of operations are included in the Company's
consolidated financial statements from the date of each respective acquisition.
The costs of the acquisitions were allocated on the basis of the estimated fair
market value of the assets acquired and the liabilities assumed. The goodwill
associated with these acquisitions is being amortized on a straight-line basis
over estimated useful lives of up to 40 years.
In 1997, the Company disposed of Judy/Instructo, Good Apple, Fearon Teaching
Aids, American Teaching Aids and Shining Star, which provide supplemental
instruction manipulatives and supplemental teacher resource materials to the K-8
market. The businesses were sold for net cash consideration of $11m. Concurrent
with the Asset Sale Agreement, a Transition Services Agreement and a Trademark
License Agreement were entered into with the buyer, for net cash consideration
of $6m. In 1995, the Company disposed of Prentice Hall Legal & Financial
Services ("PHL&FS") which represented the combination of Prentice Hall Corporate
Services, Infosearch, Charles E. Simon and Statewide/PH OnLine. PHL&FS was sold
to two separate buyers for net cash consideration of $30m and a 35% ownership
interest in one of the buyers, valued at $21m,
F-110
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
2. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
respectively. This interest was subsequently sold in 1996. The Company did not
realize any material gains or losses on the above dispositions except as
discussed in note 9.
Acquisitions and divestitures noted above did not materially impact
consolidated results, therefore no pro forma information is provided. The
Company acquired and disposed of other businesses in the periods presented which
are not considered material to the financial statements presented herein.
3. DEBT
The Company's debt represents capital lease commitments, 7.8% promissory
notes and other notes payable for acquisitions (see note 2).
The components of debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
NOVEMBER 27, 1998 ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Current
Obligations under capital leases...................... 15 12 7 3
Promissory notes...................................... - 7 - -
Notes payable......................................... 7 7 - 38
TOTAL CURRENT DEBT...................................... 22 26 7 41
Long-Term
Obligations under capital leases...................... 16 20 15 7
Promissory notes...................................... - - 7 7
Notes payable......................................... 7 7 - -
--- --- --- ---
TOTAL LONG-TERM DEBT.................................... 23 27 22 14
--- --- --- ---
TOTAL DEBT.............................................. 45 53 29 55
=== === === ===
</TABLE>
Interest costs incurred and interest income, which also reflect amounts for
certain intercompany loans between the Company and certain Viacom subsidiaries
(see note 4), are summarized below:
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED
THROUGH DECEMBER 31,
NOVEMBER 27,1998 ------------------------------
(UNAUDITED) 1997 1996 1995
---------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Interest incurred........................................ (3) (9) (8) (10)
Interest income.......................................... 4 3 3 4
-- -- -- ---
1 (6) (5) (6)
== == == ===
</TABLE>
F-111
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
4. VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED
THROUGH DECEMBER 31,
NOVEMBER 27, 1998 ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Balance as of the beginning of the year.......... 3,743 3,706 3,669 3,542
Net (loss)/earnings.............................. (67) 66 67 66
Net cash distributions to Viacom................. (76) (157) (147) (43)
Allocated charges from Viacom.................... 75 134 116 104
Currency translation adjustment and other........ (10) (6) 1 -
------ ------ ------ ------
BALANCE AS OF THE END OF THE YEAR................ 3,665 3,743 3,706 3,669
====== ====== ====== ======
</TABLE>
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. The Viacom equity investment includes
accumulated equity as well as any payables and receivables due to/from Viacom
resulting from cash transfers and other intercompany activity. Viacom generally
does not charge the Company interest on intercompany balances; however, the
Company has certain loans directly with certain Viacom subsidiaries on which
interest is charged. The following is a summary of the allocated charges from
Viacom that are reflected in the foregoing analysis of Viacom equity investment
activity:
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED
THROUGH DECEMBER 31,
NOVEMBER 27, 1998 ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Income and miscellaneous operating taxes.............. 13 75 52 42
Salaries and benefits payments........................ 44 47 53 50
Other................................................. 18 12 11 12
--- ---- ---- ----
ALLOCATED CHARGES FROM VIACOM......................... 75 134 116 104
=== ==== ==== ====
</TABLE>
5. RELATED PARTY TRANSACTIONS
Viacom provides the Company with certain general and administrative
services, including insurance, legal, financial and other corporate functions.
The charges for insurance and legal expenses were $3m, $5m, $5m and $7m for the
period January 1, 1998 through November 27, 1998 and for the three years ended
December 31, 1997, respectively, and are included in selling, general and
administrative expenses. The cost of financing activities and certain other
corporate functions, which did not benefit the Company, were absorbed by Viacom.
See note 8 for pension plan and additional employee benefit costs charged by
Viacom to the Company.
The Company shares with the Consumer division certain general and
administrative services, including warehousing and customer service functions,
as well as certain other corporate functions, including purchasing, payroll,
accounting and systems and technology support. The Company has
F-112
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
5. RELATED PARTY TRANSACTIONS (CONTINUED)
charged Consumer for Consumer's share of these services in the amount of $34m,
$37m, $39m and $38m for the period January 1, 1998 through November 27, 1998 and
for the three years ended December 31, 1997, respectively.
Management believes that the methodologies used to allocate charges for the
services described above from Viacom and to Consumer are reasonable.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom which did not
have a material impact on the financial position or results of operations
presented herein.
6. INCOME TAXES
The Company has been included in consolidated federal, state and local
income tax returns filed by Viacom. However, the tax expense reflected in the
carve-out Statements of Operations and tax liabilities reflected in the
carve-out Balance Sheets have been prepared on a separate return basis as though
the Company had filed stand alone income tax returns. The current income tax
liabilities for the periods presented have been satisfied by Viacom. These
amounts have been reflected in the Viacom equity investment in the carve-out
Balance Sheets. In connection with the transactions described in note 1, Viacom
has agreed to indemnify the Company against income tax assessments, if any,
arising from federal, state or local tax audits for periods in which the Company
was a member of Viacom's consolidated tax group.
Earnings accounted for under the equity method of accounting are shown net
of tax on the carve-out Statements of Operations.
Earnings before income taxes are attributable to the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 1, 1998 DECEMBER 31,
THROUGH $M
NOVEMBER 27, 1998 ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
United States......................................... (55) 114 122 113
Foreign............................................... (10) 34 25 31
---- ---- ---- ----
(65) 148 147 144
==== ==== ==== ====
</TABLE>
F-113
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
6. INCOME TAXES (CONTINUED)
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEAR ENDED
THROUGH DECEMBER 31,
NOVEMBER 27, 1998 ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Federal
Current................................................. - 55 34 25
Deferred................................................ 3 2 29 30
State and local
Current................................................. - 13 9 10
Deferred................................................ - - 3 2
Foreign
Current................................................. 9 12 5 11
Deferred................................................ (10) - - -
--------- --- --- ---
PROVISIONS FOR INCOME TAXES ON
EARNINGS BEFORE INCOME TAXES............................ 2 82 80 78
========= === === ===
</TABLE>
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on earnings before income taxes is as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998
THROUGH YEAR ENDED
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
<S> <C> <C> <C> <C>
Statutory U.S. tax rate................................. (35.0%) 35.0% 35.0% 35.0%
Amortization of goodwill................................ 32.1 20.5 20.5 18.7
State and local taxes, net of federal tax benefit....... 0.1 5.3 5.1 5.1
Effect of foreign operations............................ 3.0 (6.1) (6.7) (5.5)
Other, net.............................................. 2.1 0.7 0.5 0.9
----- ---- ---- ----
EFFECTIVE TAX RATE...................................... 2.3% 55.4% 54.4% 54.2%
===== ==== ==== ====
</TABLE>
F-114
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
6. INCOME TAXES (CONTINUED)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109.
<TABLE>
<CAPTION>
NOVEMBER 27, 1998 DECEMBER 31,
----------------- ------------------------------
(UNAUDITED) 1997 1996 1995
----------------- -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Current deferred tax assets
Sales returns and allowance........................... 46 57 50 44
Publishing costs...................................... 14 10 9 10
Employee compensation and other related expenses...... 46 35 30 28
Net operating loss.................................... 13 - - -
---- ---- ---- ---
NET CURRENT DEFERRED TAX ASSETS......................... 119 102 89 82
---- ---- ---- ---
Noncurrent deferred tax liabilities
Fixed asset basis differences......................... (120) (107) (83) (52)
Intangible asset basis differences and other
reserves............................................ (13) (16) (25) (17)
---- ---- ---- ---
NET NONCURRENT DEFERRED TAX LIABILITIES................. (133) (123) (108) (69)
NET DEFERRED TAX (LIABILITIES)/ASSETS................... (14) (21) (19) 13
==== ==== ==== ===
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company has long-term noncancelable lease commitments for various real
property, office space, and equipment which expire at various dates. Certain
leases contain renewal and escalation clauses for a proportionate share of
operating expenses.
At November 27, 1998, minimum rental payments under noncancelable leases,
net of sublease income are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
$M $M
<S> <C> <C>
1999 46 17
2000 36 10
2001 30 4
2002 22 3
2003 20 1
2004 and thereafter 142 1
---- ----
TOTAL MINIMUM LEASE PAYMENTS................................ 296 36
Less amount representing interest........................... - (4)
---- ----
PRESENT VALUE OF NET MINIMUM PAYMENTS....................... 296 32
==== ====
</TABLE>
Rent expense was $31m for the period January 1, 1998 through December 31,
1998 and $55m, $56m and $48m for the three years ended December 31, 1997,
respectively.
F-115
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into various purchase commitments with third party
vendors in the ordinary course of business, that include cancellation penalties
upon termination. Management does not consider these to be material to the
Company's results of operations, financial position or liquidity.
The Company has royalty advance commitments which are not reflected on the
balance sheet as of November 27, 1998 aggregating approximately $30m. The
advance commitments are primarily contingent upon delivery of finished
manuscripts and or products at various stages of completion.
The Company is involved in ordinary and routine litigation incidental to its
business. Management believes that any ultimate liability resulting from those
actions or claims will not have a material adverse effect on the Company's
results of operations, financial position or liquidity.
The Company has entered into various acquisitions and dispositions of
businesses. These transactions include indemnification clauses in the sale and
purchase agreements. There are no material indemnification claims pending
against the Company.
8. PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory defined benefit pension plan covering
substantially all of its employees, including the employees of the Company.
Retirement benefits are based principally on years of service and salary. Viacom
has charged the Company for pension expense of $5m, $7m, $6m and $12m for the
period January 1, 1998 through November 27, 1998 and for the three years ended
December 31, 1998, respectively. The related pension liability was $42m, $37m,
$29m and $34m at November 27, 1998 and December 31, 1997, 1996 and 1995,
respectively.
Viacom also provides other employee benefits to the Company's employees,
including certain post employment benefits, medical and dental insurance costs
and contributions to a 401(K) savings plan and medical benefits to substantially
all of the retirees of the Company. Viacom charged the Company $5m, $8m, $9m and
$14m for the period January 1, 1998 through November 27, 1998, and for the three
years ended December 31, 1997, respectively for these benefits. The related
liability for these other employee benefits was $96m, $105m, $106m and $102m at
November 27, 1998 and December 31, 1997, 1996 and 1995, respectively.
December 31, 1997, 1996 and 1995, respectively.
Management believes that the methodologies used to allocated pension and
other employee benefit charges to the Company are reasonable.
9. OTHER ITEMS, NET
"Other items, net" principally reflects foreign currency transaction losses
for the periods presented and, for 1996, reflects a gain of $8m from the
Company's sales of an equity investment (see note 2).
F-116
<PAGE>
SIMON & SCHUSTER (EXCLUDING CONSUMER)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JANUARY 1, 1998 THROUGH NOVEMBER 27, 1998 (UNAUDITED)
AND THE THREE YEARS ENDED DECEMBER 31, 1997
10. OPERATIONS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
NOVEMBER 27,
1998 DECEMBER 31,
------------ ------------------------------
(UNAUDITED) 1997 1996 1995
------------ -------- -------- --------
$M $M $M $M
<S> <C> <C> <C> <C>
Revenues
United States...................................... 1,371 1,557 1,489 1,378
International...................................... 292 358 295 253
------ ------ ------ ------
TOTAL REVENUES....................................... 1,663 1,915 1,784 1,631
====== ====== ====== ======
Operating income
United States (1).................................. (44) 116 105 114
International...................................... (7) 46 39 37
------ ------ ------ ------
TOTAL OPERATING INCOME............................... (51) 162 144 151
====== ====== ====== ======
Identifiable assets
United States (2).................................. 4,161 4,235 4,230 4,230
International...................................... 219 282 256 204
------ ------ ------ ------
TOTAL IDENTIFIABLE ASSETS............................ 4,380 4,517 4,486 4,434
====== ====== ====== ======
</TABLE>
------------------------
Intercompany transfers between geographic areas are not significant.
(1) Includes all intangible amortization.
(2) Includes all intangible assets.
F-117
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Presentation of Financial
Information; Exchange Rate
Information........................ ii
Prospectus Summary................... 1
Risk Factors......................... 11
Forward-Looking Statements........... 14
The US Rights Offering............... 15
NCS Acquisition...................... 24
Use of Proceeds...................... 25
Market Information................... 25
Dividends............................ 26
Capitalization....................... 27
Selected Consolidated Financial
Data............................... 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 31
Business............................. 58
Management........................... 75
Principal Stockholders............... 83
Description of Share Capital......... 83
Description of American Depositary
Shares............................. 89
Tax Considerations................... 95
Plan of Distribution................. 100
Service of Process and Enforcement of
Liabilities........................ 103
Where You Can Find More Information.. 103
Validity of Securities............... 104
Experts.............................. 104
UK Prospectus........................ 104
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
------------------------
Through and including September 26, 2000, all dealers effecting transactions
in these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to a dealer's obligation
to deliver a prospectus when acting as an underwriter and with respect to an
unsold allotment or subscription.
[LOGO]
Rights Offering of Ordinary Shares
and American Depositary Shares
--------------------
PROSPECTUS
------------------
JOINT GLOBAL COORDINATORS
<TABLE>
<S> <C>
GOLDMAN SACHS CAZENOVE
INTERNATIONAL & CO.
</TABLE>
------------------------
<TABLE>
<S> <C>
GOLDMAN, SACHS CAZENOVE
& CO. INC.
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
